Opportunity Zones 2.0 Legislation Advances: What’s Inside?

Just one day after the House Ways and Means Committee unveiled its draft Opportunity Zones legislation, Jimmy Atkinson breaks down everything you need to know—what’s in the bill, what’s missing, and why the proposed early sunset of OZ 1.0 could create major disruption in 2026. Joined by Jason Watkins of Novogradac, this episode offers a first look at the policies shaping OZ 2.0.

Guest: Jason Watkins, Novogradac

Discussed On This Episode

About The Opportunity Zones Podcast

Hosted by OpportunityZones.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

Listen Now

Episode Summary

In this special episode of The Opportunity Zones Podcast, host Jimmy Atkinson dives into the brand new draft Opportunity Zones legislation released by the House Ways and Means Committee—part of a broader 389-page tax package tied to the 2025 budget. Joined briefly by Jason Watkins of Novogradac & Company, Jimmy breaks down what’s in the bill, what’s missing, and what changes are likely as the bill moves through Congress.

Initial Reactions to the Draft

Jimmy and Jason express cautious optimism about the inclusion of Opportunity Zones (OZs) in the House’s reconciliation bill. This marks a shift from 2017, when OZs were absent from the initial House bill and only added later in the Senate. Still, both agree the current draft contains significant flaws and omissions that need to be addressed—especially if the goal is long-term program success.

What’s in the Bill?

  • New Designation Period: The bill would establish a new round of OZ designations beginning January 1, 2027 and running through December 31, 2033.
  • Zone Selection Criteria Tightened: Income threshold lowered from 80% to 70% of statewide median family income. Contiguous (non-LIC) tracts no longer allowed.
  • Emphasis on Rural Zones: At least 33% of a state’s OZs must be rural, or a percentage equal to the state’s rural population—whichever is higher.
  • Early Sunset of Current OZs: Existing OZs would expire two years early, on December 31, 2026 (rather than December 31, 2028).
  • New Deferral Date: For investments made under the new designations, capital gains would be deferred until the end of 2033 (rather than 2026).

Enhancements for Rural OZs

The bill includes several favorable provisions targeted specifically at rural zones:

  • 30% Basis Step-Up (vs. 10% standard) for rural investments held for five years.
  • Substantial Improvement Threshold Halved: The 100% substantial improvement requirement drops to 50% for existing property in rural OZs.
  • Explicit encouragement of data centers and other job-creating facilities in rural areas.

Ordinary Income Provision

A surprising addition to the draft is a new rule allowing up to $10,000 of lifetime ordinary income to qualify for OZ investment benefits. Jimmy and Jason see this provision as virtually meaningless:

  • The dollar amount is too low to be practically useful.
  • Most OZ funds have minimums far above $10,000.
  • It’s likely a symbolic inclusion to suggest the program has been “opened up” to a broader base of investors.

What’s Missing?

Despite containing some good starting points, the draft bill leaves out several key policy enhancements long advocated by the OZ industry:

  • No Permanency: There is no language making the program permanent.
  • No Rolling Deferral: Gains must still be invested on a static timeline.
  • No Interim Gains Relief: A crucial fix to enable smoother fund operations and business investment was omitted.
  • No Fund-of-Funds Clarification: Despite significant industry advocacy, the ability for fund-of-funds to qualify as QOFs remains unresolved.
  • No Expansion of Step-Ups: The previous 15% basis step-up for seven-year holds is not reinstated.

Major Concern: The 2026 “Dead Zone”

Both Jimmy and Jason emphasize a critical problem in the legislation’s structure: it risks creating a “hibernation” or capital freeze in 2026. Here’s why:

  • The current program sunsets on 12/31/2026.
  • The new program doesn’t start until 1/1/2027.
  • That leaves a full year where new OZ investment is discouraged: Investors in 2026 would get effectively no deferral period, and they would lose out on basis step-ups unless they wait until 2027 to invest.

Jimmy and Jason recommend moving the new program’s start date to January 1, 2026 or earlier—and possibly making investments in 2025 retroactively eligible for the new terms—to prevent market paralysis.

Suggested Improvements

Jimmy outlines several high-priority amendments for the Senate to consider as the bill moves forward:

  • Avoid the hibernation period by overlapping the OZ 1.0 and 2.0 timelines.
  • Expand basis step-up eligibility, especially for early adopters of the new program.
  • Lift or significantly increase the $10,000 cap on ordinary income.
  • Provide clarity on grandfathering rules to protect 2026 investments and in-process deals.
  • Add interim gain relief and flexibility for operating businesses.

Legislative Outlook

Jimmy explains the roadmap ahead:

  • The House is marking up the bill now and could pass it by Memorial Day.
  • The Senate is expected to release its version by mid-June, with action before the July 4 recess.
  • The final package could reach President Trump’s desk by August—his administration and the GOP are backing the “One Big Beautiful Bill,” and Opportunity Zones appear to be part of the plan.

Final Takeaways

While Jimmy celebrates the inclusion of OZ provisions in the House’s draft, he warns that the bill is “far from final” and still “misses the mark” in several areas. The next several weeks will be critical for stakeholders to advocate for fixes—particularly addressing the 2026 transition, enhancing rural incentives, and ensuring the program remains a viable tool for economic development.