What if you could defer, or even exclude, your capital gains taxes just by helping struggling communities? That’s the promise of Qualified Opportunity Zones (“QOZs”), a federal program that rewards investors who support revitalization efforts in areas that need it most.
Why Now? New Rules Make It Easier Than Ever.
Investing in rural QOZs just got more attractive!
On September 30, 2025, the IRS issued Notice 2025-50, providing updated guidance for taxpayers on how to meet the “substantial improvement” requirement for properties located in rural QOZs. Investors may now satisfy this requirement by improving a property by just 50% of its original basis — down from the previous 100% threshold.
How QOZs Work? A Proven Tax Strategy.
The QOZ idea took shape in 2017 when Congress established QOZs through the Tax Cuts and Jobs Act (“TCJA”). Under the TCJA, investors who reinvested capital gains from the sale of assets into Qualified Opportunity Funds (“QOFs”) within 180 days could defer taxes, receive a step-up in basis, and potentially exclude future appreciation from taxation. The deferred gain became taxable on the earlier of December 31, 2026, or the date the QOF investment was sold. Investors who held their QOF investment for at least 5 years qualified for a 10% exclusion of the original deferred gain, which increased to 15% after 7 years. Those who held their investment for 10 years or more could exclude all post-investment appreciation from federal capital gains tax.
2025 Legislative Update: More Flexibility, More Control.
On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) changed the QOZ program. Effective January 1, 2027, the OBBBA replaces the one-time deferral deadline with a rolling five-year window from the date of each qualifying investment. The OBBBA simplifies the basis step-up to a single 10% after 5 years, retains the 10-year full exclusion of post-investment gains, and caps long-term appreciation by freezing the basis after 30 years. It also introduces new rules for rural zones, redesignates zones every decade, and imposes stricter reporting requirements.
The chart below outlines how QOZ features have changed following the OBBBA:
Now, consider the following scenario:
You sold your business in 2025 and realized a $10 million capital gain. Ordinarily, that gain would be subject to federal capital gains tax at a maximum rate of 23.8%. To mitigate this liability, you consider reinvesting the gain into a QOF.
At this point, a critical threshold question arises: which QOF regime would a new investment fall under — the existing, pre-OBBBA regime or the new regime scheduled to take effect in 2027?
Under the original QOZ framework, any capital gain deferred through a QOF investment must be recognized no later than December 31, 2026. As a result, a taxpayer who recognizes gain in 2025 and reinvests it immediately may receive only a short deferral period, significantly limiting the value of the incentive.
This creates a planning challenge — but also an opportunity.
One potential strategy is to structure the business sale as an installment sale, with the final $10 million payment received in 2027 rather than 2025. Under current IRS rules, each installment payment is treated as a separate gain recognition event, with its own 180-day window to reinvest in a QOF. By deferring receipt of the final installment until 2027, the associated gain may be eligible for reinvestment under the new OBBBA QOF regime, rather than being locked into the expiring pre-2027 rules.
This approach can effectively extend the deferral period beyond 2026 and align the investment with a more favorable opportunity zone framework.
Will this new structure work? Yes, using the installment sale approach may offer a planning opportunity for investors seeking to maximize deferral during the transition to the new rules. However, it is important to note that full IRS and Treasury guidance under the post-OBBBA QOZ framework has not yet been issued.
In the meantime, a solid understanding of the existing QOZ framework remains essential. The fundamental rules established under the TCJA are still in effect, and the Treasury Department and IRS issued three rounds of regulations in 2018 and 2019 to clarify how the program functions. For a deeper dive of QOZ mechanics like investor elections, exit strategies, and asset tests, please see Hanson Bridgett’s analyses of the 2018 regulations and the 2019 regulations. These remain valuable resources as we await additional guidance under the OBBBA.
Timing is critical. For individuals or businesses considering a QOF investment today, especially with major changes ahead, early planning can make a meaningful difference in your tax outcomes.
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