The Opportunity Zones (OZ) program is a tax incentive designed to spur investment and economic development in low-income census tracts. This guide will explain how Opportunity Zones work; their potential benefits; key considerations for cities, investors, and other community stakeholders; as well as what changes have been made to the program in the recently-enacted H. R. 1.

What is an opportunity zone?

Opportunity Zones were designed to encourage private investment in disadvantaged communities through tax incentives. They can be used for a wide variety of project types, including affordable housing, real estate, and mixed-use neighborhood redevelopment. While the tax incentives encourage private sector investment, in doing so they can also reduce the costs of redevelopment projects for cities.

Opportunity Zones were created through a temporary authorization in the Tax Cuts and Jobs Act of 2017 and were a bipartisan initiative spearheaded by Senators Cory Booker and Tim Scott and a priority for the first Trump administration. They were set to expire at the end of 2026, but H. R. 1 made them permanent.

To be eligible for tax incentives, investment in Opportunity Zones must be made through a fund set up specifically for this purpose (called either a Qualified Opportunity Fund (QOF) or, for rural areas, a Qualified Rural Opportunity Fund (QROF). The tax incentives include: 

• A temporary tax deferral for capital gains reinvested in an Opportunity Zone.
• A 10 percent basis step-up for investments in Opportunity Zones held for at least five years.¹
• A 30 percent basis step up for investments in newly created rural Opportunity Zones.
• For investments in Opportunity Zones that are held for at least 10 years, investors receive a permanent exclusion from capital gains taxes when the investment is sold or exchanged.

How do you know if your community has Opportunity Zone status?

In 2018, the Community Development Financial Institutions (CDFI) fund designated specific Census tracts as qualified Opportunity Zones. These current designations will remain in place through the end of 2026. Tracts identified using the new eligibility criteria outlined in H. R. 1 will be used beginning January 1, 2027. Moving forward, the list of eligible tracts will be revised every 10 years.

Under H. R. 1, census tracts need to meet at least one of the below descriptions to be eligible for Opportunity Zone investments: 

• Have a median family income below 70% of the metro area or, in the case of rural tracts, the state; the previous threshold was 80%, so this will reduce the number of tracts that qualify.
• Have a poverty rate of 20% or higher, with median family income no greater than 125% of the surrounding metro area or state.

The Economic innovation Group has created a map with estimates of which census tracts will qualify under the new rules.

It is important to note that not all eligible low-income and adjacent communities received an Opportunity Zone designation, as the program limited the designation to 25% of the tracts or a minimum of 25 tracts if the state had fewer than 100 total tracts. Governors submit their recommendations to the federal government as to which eligible tracts should receive an Opportunity Zone designation.

To determine the current status of census tracts in your community, see this map from the Department of Housing and Urban Development or this list from the Internal Revenue Service. These designations are in place until the end of 2026.

The Opportunity Zone page of the Internal Revenue Service will soon have additional up-to-date regulatory information about the tax incentive reflecting the changes in H. R. 1. 

Special incentives for rural investments

Rural Opportunity Zones were a new creation in H. R. 1. The definition of rural used in the legislation is any area not within or adjacent to a town with over 50,000 inhabitants. Some small cities and large towns will qualify. As described above, investments made in rural areas through QROFs benefit from a 30% basis step-up, a much higher incentive intended to account for the longer development timelines and higher risks associated with projects in rural areas.

H. R. 1 also lowers the threshold for an investment in an existing property to be considered a “substantial improvement.” To qualify, retrofitting and remodeling projects used to have to double the value of a property and now they only have to increase it by 50%.

How to make the most of Opportunity Zones

Opportunity Zones can be used for a variety of projects, but the most common investments are in commercial and industrial real estate, residential real estate and housing, especially multi-family housing, and business.

How Cities are Leveraging Opportunity Zones

Erie, PA

The city leveraged Opportunity Zone designation to attract over $100 million in private investment in addition to other funding sources to revitalize its downtown and waterfront neighborhoods. The project created 110 new housing units, a grocery store in an area previously designated a food desert, 25 new businesses and 100,000 square feet of commercial space, and restored eight historic properties.

San Antonio, TX

The city took an active approach to Opportunity Zone investment, with the San Antonio Economic Development Department appointing an Opportunity Zones Manager to coordinate and to assist investors and developers in navigating city rules and regulations. Development supported by Opportunity Zone investments helped build over 600 mixed-income housing units, retail space, a local start-up incubator and businesses in the city.

Birmingham, AL

Opportunity Zone designation encouraged private investment in a building that had been vacant for 36 years and was renovated into 140 housing units. Opportunity Zone investments also encouraged a mixed-use project that included retail, office, and residential development in the downtown area that helped to stem revenue losses as a result of vacant office space post-pandemic.

A significant portion of Opportunity Zone investments go toward increasing the supply of multi-family housing and in some cases bringing down rental costs. These benefits are often cited as one of the more positive outcomes of the Opportunity Zone program. Cities that were most successful at leveraging Opportunity Zone investments have been strategic about fitting Opportunity Zones into their overall priorities and played an active role in driving investments toward projects that fit in with their existing vision and planning.

¹ A step-up basis means that a portion of the gains earned on the investment are not subject to capital gains tax. For example if you make a $50,000 investment and earn 20% return ($10,000) on it over the course of 5 years and the step-up basis is 10%, you only pay taxes on $5,000 of your $10,000 gains.