Opportunity Zone Legislation Advances, But Misses The Mark

Opportunity Zone legislation is coming closer to fruition. On May 12, the House Ways & Means Committee released a 389‑page reconciliation bill draft—branded “The One, Big, Beautiful Bill.” Tucked inside pages 158‑165 is the subtitle “Renewal and Enhancement of Opportunity Zones,” the first formal OZ 2.0 legislative text to keep the policy alive beyond its scheduled sunset on December 31, 2026.

The draft unquestionably proves that Congress still cares about the program, yet the fine print leaves a yawning gap between investor reality and policy aspiration.

Below is a plain‑English walkthrough of what the bill would do, followed by my own assessment of where it hits—and where it badly misses.

What’s In The Draft Opportunity Zone Legislation

Here are the seven key Opportunity Zone provisions in the first draft of the House reconciliation bill.

1. A Tightened Definition Of “Low-Income Community”

  • The income threshold for census tracts that qualify as OZs would drop from 80 % to 70 % of area/state median family income.
  • Any tract whose median family income is at least 125 % of the statewide (or metro‑wide) median would be categorically barred.

2. A New, Rural‑Heavy Round Of Opportunity Zone Designations

  • Governors could nominate a new map that takes effect January 1, 2027 and runs through December 31, 2033.
  • Treasury may designate up to 25 % of a state’s eligible tracts, but at least the greater of one‑third of those designations or the state’s rural‑population share must be entirely rural.
  • Contiguous non-low income tract designations are no longer allowable.

3. Early Expiration Of The 2018 Opportunity Zone Designations

  • All current OZ designations expire on December 31, 2026. (Previously, these had been set to expire on December 31, 2028.)

4. New Deferral And Inclusion Dates

  • Gains invested after December 31, 2026 and before January 1, 2034 may be deferred until December 31, 2033.
  • There is no extension of the current program. Gains invested under the original rules are still recognized on December 31, 2026.

5. Revised Basis Step-Up Regime

  • The familiar two‑tier 10 %/+5 % step‑ups are replaced by a single 10 % boost after five years.

6. New Enhancements For Rural Opportunity Zone Investments

  • Investments made through a Qualified Rural Opportunity Fund (QROF) enjoy a 30% basis increase after five years—triple the urban rate.
  • For buildings in an all‑rural zone (including data centers) the substantial‑improvement requirement falls from 100% to 50% of original basis.

7. Limited Ordinary Income Deferral

  • A taxpayer may elect OZ deferral on up to $10,000 of ordinary income per year, with a total lifetime aggregate limit of $10,000 per taxpayer.
  • Ordinary income deferred into an OZ investment is eligible for the 10-year exclusion benefit, but is not eligible for the 5-year basis step‑up.

How The House Draft Falls Short

A Potential 2025‑26 Capital Freeze

By sunsetting the current map on December 31, 2026 and postponing the new one until January 1, 2027, Congress has inadvertently engineered a 12‑month (or longer) “dead zone.” Investors who harvest gains in late 2025 or 2026 will confront a Hobson’s choice:

  • Deploy into a tract that may or may not die after 2026; or
  • Sit on the sidelines until the new map is published and better incentives are available.

Either way, OZ capital formation—already sagging in a higher‑rate environment—could stall very abruptly across the remainder of 2025 and all of 2026.

Shrinking The Urban Footprint

The draft’s rural quota means the 2027 map will almost certainly shed urban tracts to make room for new rural ones. That alone is not fatal—rural America deserves fresh tools—but the bill does nothing to preserve proven urban success stories (think downtown Birmingham or Erie) that still have years of pipeline left.

Limited Step-Up Benefits

A single 10 % basis bump after five years may look fine on paper, yet it slices today’s 15 % maximum benefit by one‑third, eliminating the seven‑year hold benefit.

Ordinary Income Deferral Cap

Allowing $10,000 of ordinary income to enter an OZ fund is a nice talking point about democratizing access to the program, but in practice it is below the minimum check size for almost every QOF raising capital in the market.

Key Industry Enhancements Left Out

  • No permanence or automatic extensions; the cliff still looms in 2033.
  • No rolling deferral period.
  • No carve‑out for fund‑of‑funds, hamstringing diversified vehicles that could funnel capital into smaller operators.
  • No meaningful expansion for non‑capital gains beyond the token $10k per year in ordinary income.
  • No interim gains relief.

The Big Picture On Opportunity Zone Legislation

From a macro standpoint, simply appearing in the House’s flagship reconciliation vehicle is a political victory. It validates the data lawmakers have been hearing—job creation, wage growth, and rising home values in designated tracts—and it keeps an OZ champion like Senator Tim Scott in the driver’s seat.

Yet legislation is supposed to solve problems, not postpone them. By ignoring the looming 2026 inclusion event and shrinking incentives in real terms, the draft risks stalling projects now in order to juice take‑up later. Community planners cannot design a 200‑unit workforce housing deal in 2025 if the census‑tract status is unknowable for two more years.

Path Forward: What The Senate Must Fix

In my view, these are the four biggest issues the need to get fixed in an amended version of this new OZ 2.0 legislation:

1. Bridge The Gap To The New Program

There are a few ways to address this issue that may otherwise lead to a capital freeze in 2025 thru 2026:

  • Advance the start line. Rewrite the bill so investments made after December 31, 2025 (not 2026) qualify for the new regime. That single‑word tweak keeps late‑2025 / 2026 capital in play.
  • Create an overlap. Let the 2018 map remain valid through at least December 31, 2027. Developers can finish deals already teed up while governors finalize the new designations.
  • Grandfather projects already under way. Any deal that closes or breaks ground before December 31, 2026 should continue to enjoy OZ benefits—even if its tract falls off the 2027 map.

2. Make OZs Permanent, With Rolling Deferrals

Give Treasury authority to renew zones in 7‑ or 10-year blocks and allow investors to keep rolling gains into qualifying funds up to each new sunset. That eliminates future “cliff” years and steadies fundraising.

3. Allow Interim Gains

Allow gains generated inside a QOF—such as the sale of a stabilized phase or an out‑parcel—to be redeployed into new OZ assets within the same fund without triggering tax. That keeps multi‑asset strategies viable and construction crews working. And it ultimately creates more economic activity in Opportunity Zones.

4. Allow For Fund Of Funds

Permit a parent QOF to count equity interests in underlying, compliant QOFs toward its 90 percent test. Diversified funds would then channel capital to small, rural, or niche operators the big sponsors miss—exactly the policy goal of the bill.

5. Allow Non-Capital Gains Dollars To Participate More Meaningfully

Raise or eliminate the ordinary income deferral cap from the token $10,000 to at least $50,000, and extend the 10 percent five‑year basis boost to those dollars. If this idea ends up scoring too high, it may be prudent to eliminate it entirely, in favor of the other four ideas above.

What Happens Next With Opportunity Zone Legislation

The House Ways & Means Committee will mark up the bill this week, aiming for a House floor vote before Memorial Day. The Senate is expected to bypass committee and take the measure straight to the floor in mid‑June, where OZ champions Sen. Tim Scott and Sen. Mike Crapo may draft amendments to patch the holes listed above. If the two chambers “ping‑pong” rather than conference, OZ advocates will have only a few brief windows to influence the final text. (The window is now!)

Bottom line: Opportunity Zones may live to fight another day, but unless the Senate amends the bill to address the concerns outlined above, many OZ projects—and the communities they serve—may spend 2026 in legislative limbo.