Qualified Opportunity Zone (QOZ) Planning Strategies Post OBBBA

“Qualified Opportunity Zone (QOZ) Planning Strategies Post OBBBA,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Estate Planning Under the One Big Beautiful Bill Act (OBBBA)

• Part 1: Estate & Gift Tax and Charitable Contributions Under the OBBBA 
• Part 2: Qualified Opportunity Zone (QOZ) Planning Strategies Post OBBBA — (this podcast)
• Part 3: How the OBBBA Impacts Qualified Small Business Stock (QSBS) — (posts September 16)
• Part 4: Qualified Business Income (QBI) Post-OBBBA — (posts September 23)

Additional Resources

• R.1 – One Big Beautiful Bill Act
• IRS Fact Sheet

I’m ACTEC Fellow Stacy Singer from Chicago.

The One Big Beautiful Bill Act and Qualified Opportunity Zones

Today we explore how the One Big Beautiful Bill Act impacts Qualified Opportunity Zones (QOZ) and their planning. With sweeping changes to tax laws, estate planners and investors alike must reevaluate their strategies for leveraging QOZs as a tool for tax deferral, exclusion, and community investment.

ACTEC Fellow Kevin Matz of New York City breaks down the latest developments, highlighting what’s changed, what stayed the same, and how to make the most of QOZ opportunities under the new law. Welcome, Kevin.

Kevin Matz:  Thank you, Stacy. Hello, everyone. On July 4, 2025, President Trump signed into law the One Big Beautiful Bill Act. More formally known as HR1 and also known, I think I’ll refer to it, as OB3.

Now OB3 includes provisions that establish a second tranche of the Qualified Opportunity Zone, called QOZ, and Qualified Opportunity Fund, QOF, program that generally applies beginning on January 1, 2027. Now this second tranche picks up following the conclusion of the initial QOZ/QOF program on December 31, 2026, which date marks the end of the original program’s investment period and also the date when deferred gain is recognized under current law, that law being under the 2017 Tax Cuts and Jobs Act. In this talk, I’ll be addressing the principal features of this second tranche and do so in the context of QOZ planning that implicates estate planning.

What Stayed the Same Under OB3

As I’ll further discuss, many of the state planning specific rules in the context of QOZs and QOFs under the 2017 Tax Cuts and Jobs Act are effectively unchanged under OB3. Accordingly, what does that mean? It means careful identification of interest in QOFs and planning with QOFs continues to be required. In addition, investors in QOFs under the Tax Cuts and Jobs Act need to be mindful of the upcoming inclusion event date of December 31, 2026. For those who’ve heard me speak about this before, I’d love to refer to this as “Judgment Day”. I know watching too many Terminator movies, Arnold Schwarzenegger growing up.

And also, they have to carefully consider the liquidity needs to fund deferred capital gains tax liability that will very soon, just around the corner, be coming due as a result of this upcoming gain recognition date.

Opportunity Zone Benefits Explained

Let’s first turn back the clock to 2017. 2017 Tax Cuts and Jobs Act included in Section 1400Z-2, what was that a new tax incentive provision intended to promote investment in economically distressed communities referred to as Opportunity Zones. Through this program, investors could achieve the following three significant tax benefits.

1. Deferral of gain on the disposition of property to an unrelated person, generally, until the earlier the date on which the subsequent investment is sold or exchanged, or December 31, 2026 — Judgment Day — as so long as the gain is reinvested in a QOF, Qualified Opportunity Fund, within 180 days or 180 deemed days of the property’s disposition. Notably, there’s no interest charge on this deferral.
2. The elimination of up to 15% of the gain that has been reinvested in a QOF, provided that certain holding period requirements are met.
3. The potential elimination of tax on gains associated with the appreciation in the value of a QOF, provided that the investment in the QOF is held for at least 10 years.

Defining Opportunity Zones and Qualified Opportunity Funds

What’s an Opportunity Zone? An Opportunity Zones in the economically distressed community, where new investments under certain conditions may be eligible for preferential tax treatment, localities qualify as Opportunity Zones if they’ve been nominated for that designation by the state and the nomination has been certified by the IRS.

What’s the definition of a Qualified Opportunity Fund? A QOF, Qualified Opportunity Fund, in turn, is an investment vehicle that is established as either domestic partnership or domestic corporation. (Note: single-member LLC disregard entities are not permissible here). For the purpose of investing in eligible property that is located in an Opportunity Zone and uses investor gains from prior investment as a funding mechanism. To become a QOF, the entity self-certifies itself. The entity must meet certain requirements, in particular a general requirement, at least 90% of its assets be, “Qualified Opportunity Zone property”, used within an Opportunity Zone, but importantly, no approval or action by the IRS is required. To self-certify, the entity completes the IRS Form 8996 and then attaches that form to the entity’s timely filed federal income tax return for the taxable year taking into account extensions.

Estate Planning Rules for QOFs

Let’s now focus on some of the more estate planning specific rules of the Opportunity Zone Regime. Now Section 1400Z-2(e)(3) provides that, “in the case of a decedent, amounts recognized under this section shall, if not properly included in the gross income of the decedent, be included in gross income as provided by Section 691.”

Now 691, as many of you know, sets forth the rules that apply to a person’s receipt of income in respect of decedent or IRD. IRD refers to income that’s earned by a decedent who was a cash basis taxpayer prior to his or her death, but that is not properly included in income until after the decedent’s death. IRD is not reportable in the decedent’s final income tax return. Rather, it’s reportable by the recipient of the IRD item, such as the decedent’s estate or some other person who’s inherited the asset.

Importantly, under Section 1014(c), there is no step up in basis on death in the case of IRD. That means that if someone inherits an interest in the Qualified Opportunity Fund, they are also inheriting a built-in income tax liability that comes due on Judgment Day, and when is that? Outside date December 31, 2026. Now, very importantly, what’s the amount that comes due? Lots of people haven’t focused on this. It is very significant, will be of increasing significance as we get closer to December 31, 2026. There’s a special rule that caps the fair market value at the date of the triggering event.

Section 1400Z-2(b)(2) contains a special rule that caps the amount of the gain so as not to exceed the fair market value of the investment as of the date the gain is included in income. What does this mean? It means, let’s say the deferred gain amount, putting aside basis adjustments, is $20 million. But the QOF interest — Qualified Opportunity Fund interest — has gone down to $5 million. Do you include the $20 million or include the $5 million? This rule says you include the lesser of the two amounts and therefore you cap that gain prior to basis adjustments at only $5 million. Very significant.

Now, people may say, well, what about discounts? Does that control lack of marketability? The final regulations that came out in late 2019, published in the Federal Register in early 2020, addressed that specifically, anticipated, and said essentially no discounts for lack control and lack of marketability for purposes of determining fair market value.

Gifting, Bequests, and Traps for the Unwary

What about gifts and bequests? Under the final regulations — and this stuff is counterintuitive — gifts other than to a grant or trust are treated as a disposition of the QOZ investment triggering inclusion deferred gain and income. This is a huge trap for the unwary. I’ve inquired whether this would survive a challenge to the regulation under Loper-Bright doctrine, but that is a trap the unwary got to watch out for. You make a gift, I make a gift to my son, I don’t do it in a grant or trust, give a gift of an interest in a QOF, that is a deemed sale. Watch out.

In contrast, if a gift is due to a grant or trust, it’s not treated as a deemed disposition of the QOZ investment and therefore will not trigger inclusion of the deferred gain and income. In addition, final regulations I mentioned issued late 2019 clarified this treatment also applies to all transactions of grantor trust, which would include sales or other transactions of grantor trust such as swaps. Final regulations further clarified that it does not matter whether the investment or capital gain is by the grantor or the grantor’s grantor trust. Further, the quest upon death permits the transferee to step into the transferor’s shoes and continue to hold the QOZ investment or QOF investment as if the transferee were the original investor. So, there is, as mentioned before, no step up in base as respect to QOF interest.

What does that mean that the person who’s inherited has to do? Date two, have to plan for Judgment Day, December 31, 2026, outside date that is soon upon us. In addition, five-year, seven-year, 10-year holding period benefits tacked to the transferee in the case of gifts to grantor trust and also bequest upon death.

Other estate planning specific important aspects under the final regulations concerning the pass-through entities. The final regulations included special provisions by which gain recognized by a partnership may, except to the extent that the partnership elects to roll over the gain itself, flow through the partners and be reinvested by such partners into the QOFs.

In addition, there’s a potential for such partners to have an increased period during which to reinvest gain in the QOF. Now the partnership’s 180-day period begins with a date of sale, but if the gain flows through the partners, then the partner’s 180-day period begins on the last day of the partnership’s taxable year. Partners also may elect to use the partnership’s 180-day period if they so desire, for example if the desired investment in the QOF is already lined up. Now the final regulations also provided an additional option under which investors may elect to start their 180-day period for their share of gain for the pass-through entity on the due date without extensions of the pass-through entity’s tax return for the taxable year in which a sale or exchange took place generally either March 15th or April 15th, the following year. That was an item that ACTEC addressed in its comments back in 2019 on the proposed regulations.

Just a few further items of the final regulations that I want to note. Number one, and these are rules that are in many cases counter-intuitive, so you have to know, you have to be mindful of in advising clients.

• Number one, there’s no inclusion of any contributions of QOF interest to partnerships. That makes sense under Section 721. However, counter-intuitive, if you have a contribution of QOF interest to a corporation, C corporation or S corporation, that is an inclusion event under final regulations.
• A further rule, and this is a huge trap for the unwary, what if you transfer an interest in a partnership that holds a QOF interest and it’s not to a grant or trust? Final regulations came out late 2019 says that is an inclusion event. Again, trapped in the unwary, something that’s not consistent with that, if you do the same transfer not to, and there’s an interest in a corporation that holds QOF interest, that is not an inclusion event.
• And then also there are special rules that apply to QSST and ESBT conversions that you need to be mindful of.

OB3 Changes: Tranche Two and New Rules

Against this backdrop, OB3 includes the following changes pertaining to QOFs and QOZs.

• Number one, as mentioned before, the QOZ program has been extended indefinitely. It’s no longer a termination date. With a new second tranche starting on January 1, 2027, the original QOZ program was scheduled to expire for new investments on the judgment date, December 31, 2026. OB3 creates a second tranche starting January 1, 2027. In this second tranche, every 10 years, state governors will propose QOZs and the secretary of the treasury will certify those zones with the effective date for those new QOZ destinations to be July 21, 2026, and every 10 years thereafter.
• Second, the stricter eligibility criteria that apply to QOZ destinations. Basically, without going into too much detail, OB3 tightens the rules under which census tracts can qualify as QOZs, the OB3 in this regard repeals the much criticized contiguous rule, which allowed a census tract contiguous to a low income community to be designated as QOZ census tract, so long as its median family income did not exceed 125% of median family income, the low income community to which the tract was adjacent.
• Third, very significant, there’s now a new rolling five-year gain deferral and a permanent 10% basis step up. So, for investments after December 31, 2026, gains deferred through investment in the QOZ program will now be recognized on the fifth anniversary of the investment date, unless there’s an earlier sale or exchange, including a deemed sale or exchange as discussed previously, rather than on a fixed date. OB3 also makes permanent a 10% basis step up, which takes effect immediately before the end of the five-year deferral period. This means that after December 31, 2026, all gains that are not prematurely triggered, such as through a sale or exchange or deemed sale or exchange of an investment in QOF will have the benefit of a 10% basis increase after five years. Notably OB3 eliminates the additional 5% basis step up, which previously applied with in the case of a 7-year old holding period on the Tax Cuts and Jobs Act and caps that benefit at 10%.
• Fourth, and this too is very significant, there is now a new species of Opportunity Zone Fund called a Qualified Rural Opportunity Fund, and that provides heightened benefits. What is this? It’s a Qualified Rural Opportunity Fund, let’s call it a QROF. It’s a Qualified Opportunity Fund in which it’s 90% asset test, including respect to any QOZ business in which a Qualified Opportunity Fund owns an interest is comprised entirely of rural area property. You may ask, what’s rural area property? Well, it’s defined in the statute in OB3 as any area other than number one, a city or town there’s a population greater than 50,000 or number two, an urbanized area adjacent to a city or town that has a population nexus of 50,000.

Tax benefits to be obtained by QROFs, significantly enhanced relative to those available to regular old QOFs.

• Number one, you get a 30% basis step up after five years, compared to the 10% basis step up for regular QOFs.
• And then, secondly, not to get too technical, there’s a relaxation of the substantial improvement requirement, basically a 100% test to double basis over a period is reduced to 50%.

Next, just to know quickly, there is now gain elimination frozen after 30 years, OB3 eliminates the sunset provisions terminating QOZ benefits or QOF investments liquidated after December 31, 2047 and establishes in this place a 30-year rolling horizon and gain elimination respect to post 10 year dispositions of QOZ investments. For investments sold or exchanged before 30 years, step up will reflect the fair market value of the investment as of the date such investment is sold or exchanged. In contrast, for investments held 30 years or more, the basis step up will be frozen at the fair market value on the 30th anniversary of the new investment.

What Estate Planners Need to Know Now

There are also new reporting requirements and penalties for non-compliance under OB3. In sum, what are we looking at here? We’re looking at a January 1, 2027 effective date for a tranche two the Opportunity Zone program. However, very importantly, the rules that implicate estate planning are generally unchanged. Again, nearly all the new QOZ provisions take effect after December 31, 2026, there are limited exceptions. And that date, that’s very critical. It marks the end of the original program’s investment period and the day when deferred gain is recognized under current law, i.e. Judgment Day. It now is expected that we’re going to get regulations issued by Treasury prior to January 1, 2027 to fill in the legislative gaps.

Now very importantly, estate planning specific provisions that I’ve discussed are effectively unchanged by OB3. So careful identification of interest in QOFs, you got to know what you have. And planning with them continues to be required. In addition, investors in QOFs on the 2017 Tax Cuts and Jobs Act need to be mindful of the upcoming, I’m just going to say inclusion event, but let me just substitute – Judgment Day of December 31, 2026.

What does this mean? Accordingly, investors in QOFs under the Tax Cuts and Jobs Act should carefully, carefully consider the liquidity needs to fund the capital gains tax liability that is soon coming due as a result of the upcoming gain recognition.

Stacy Singer:  Kevin, that was, wow, amazing. I think we all know so much more about Qualified Opportunity Zones and Qualified Opportunity Funds. Thanks so much.

You may also be interested in:

• Follow Up on the 2017 Tax Cuts and Jobs Act (Dec 2018)
• Qualified Opportunity Funds and Opportunity Zones (Apr 2019)
• The Opportunity Zones Transparency, Extension, and Improvement Act (Jan 2024) 

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