Recent Baker Tilly year-end tax webinars highlighted sweeping changes to the Opportunity Zone program under the One Big Beautiful Bill Act, with experts urging practitioners and taxpayers to carefully navigate new rules, compliance demands, and state-federal conformity as tax season approaches.
Background
Opportunity Zones (OZs) were established by the Tax Cuts and Jobs Act (TCJA) of 2017 to spur investment in economically distressed communities. The program allows investors to defer and potentially reduce capital gains taxes by reinvesting those gains into Qualified Opportunity Funds (QOFs), which in turn invest in designated OZs. Under the original rules, investors could defer gains until the end of 2026, receive a basis step-up for longer holding periods, and permanently exclude appreciation after 10 years.
The OBBBA, signed July 4, 2025, overhauled the program — often called OZ 2.0. Key changes include a rolling five-year deferral for new investments after December 31, 2026, new zone designations effective January 1, 2027, and an overlap period with old zones until December 31, 2028.
The basis step-up is now 10% for regular OZs and 30% for rural OZs, with a 30-year limit for gain exclusion. The OBBBA also introduced enhanced compliance and reporting requirements and made the program permanent.
Tax Planning
Pass-Through Entities
The OBBBA’s changes to the Opportunity Zone program have significant implications for pass-through entities (PTEs), such as partnerships and S corporations. Baker Tilly Managing Director Jim Dubeck, who specializes in partnership taxation, explained that the new rules provide “significant planning opportunities” but also introduce considerable complexity. Under the original regime, investors could defer capital gains until the end of 2026 if they invested in compliance with Qualified Opportunity Fund (QOF) rules, which required substantial improvement to property and adherence to working capital safe harbor provisions. If the investment was held for at least 10 years, any appreciation in the investment could be permanently excluded from income.
Dubeck noted that the typical structure involves a two-tier partnership: a fund at the top and a qualified opportunity zone business (QOZB) holding the property. The OBBBA, effective January 1, 2027, replaces the previous seven-year hold for a 15% basis bump with a five-year investment deferral period and a 10% basis bump. The deferral period now starts on the date of investment, rather than ending at a fixed date, providing greater flexibility for phased investments and buildouts of different properties.
The new rules also cap the maximum deferral period at 30 years and introduce a new category: Qualified Rural Opportunity Zones, which offer a 30% basis bump for investments in designated rural areas. Dubeck cautioned that “these offer a substantial amount of flexibility, and on a go-forward basis, allows for much more significant planning opportunities that you should work with very carefully due to the extremely complex rules associated with these.”
Individual Taxpayers
For individual taxpayers, the Opportunity Zone program continues to offer significant tax benefits, but the transition from OZ 1.0 to OZ 2.0 requires careful attention to timing and eligibility. Michael Lum, a director in Baker Tilly’s private wealth practice, explained that the original program allowed for temporary deferral of previously earned capital gains until the end of 2026, a basis step-up depending on the holding period, and permanent exclusion from taxable income for appreciation if the investment was held for at least 10 years.
Lum noted that the current OZ program remains unchanged for investments made before the end of 2026, and deferred gains are still taxable on December 31, 2026. For underperforming investments, it is important to consider valuations, as a lower fair market value could reduce tax liability. He also discussed the potential for loss harvesting in 2026 to offset deferred gains but clarified that gains from OZ 1.0 cannot be rolled over into OZ 2.0.
OZ 2.0 rules apply to amounts invested in QOFs after December 31, 2026. Each state will create new Opportunity Zones by July 1, 2026, effective January 1, 2027. The definition of low-income community and census data will differ from the original, so existing zones may not keep their status.
State and Local
The OBBBA’s changes to the Opportunity Zone program also have important implications at the state and local level. Lum emphasized that by “July 1 of 2026, each state will create new Opportunity Zones, and those designations … become effective January 1, 2027,” highlighting the need for careful planning during the transition period.
Baker Tilly State and Local Tax Directors Mark Hawkins and Shannon Bonner focused on the challenges of state conformity. Hawkins explained that the “starting point whenever Congress makes a significant change to federal income tax law … is how do the states conform themselves to the Internal Revenue Code?” He noted that while some states automatically adopt such changes, others require legislative action.
Bonner added that states “continue to come out with guidance … something to definitely keep track of.” The pair cautioned that many states had completed their 2025 legislative sessions before the OBBBA was enacted, so responses may be delayed, and state-level treatment may differ from federal, impacting planning and compliance.
States use different mechanisms to conform to the Internal Revenue Code, which affects how quickly and to what extent federal OZ changes are adopted at the state level. Some states automatically conform to federal changes (rolling conformity), while others require legislative action (fixed-date or selective conformity). With the overlap between old and new zones, states may recognize different zones or apply different rules during the transition period.
For more on Opportunity Zones, see Checkpoint’s Federal Tax Coordinator 2d ¶ I-8838.
Take your tax and accounting research to the next level with Checkpoint Edge and CoCounsel. Get instant access to AI-assisted research, expert-approved answers, and cutting-edge tools like Advisory Maps and State Charts. Try it today and transform the way you work! Subscribe now and discover a smarter way to find answers.
