The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, transformed two of the most powerful tax strategies available to real estate investors. Opportunity Zones became a permanent fixture of the Internal Revenue Code under Section 70421, while 100% bonus depreciation was restored indefinitely for qualifying property placed in service after January 19, 2025. Together, these changes create unprecedented opportunities for real estate investors.
For investors deploying capital gains into Qualified Opportunity Funds, cost segregation studies now deliver even greater value. The combination of tax-free appreciation after ten years, permanent elimination of depreciation recapture, and immediate first-year deductions through accelerated depreciation creates a compelling tax strategy that rewards patient capital.
Opportunity Zones 2.0: What Changed
The OBBBA fundamentally restructured the Opportunity Zone program originally created by the Tax Cuts and Jobs Act of 2017. Understanding these changes is essential for investors considering OZ investments in 2026 and beyond.
Permanent Status and Rolling Deferrals
Under Section 1400Z-2 as amended, Opportunity Zones are now permanent. The original program set a fixed deferral deadline of December 31, 2026, meaning investors who entered in recent years received diminishing deferral periods. An investor entering in 2020 received roughly seven years of deferral, while someone investing in 2025 receives barely a year, hardly an attractive proposition.
The new legislation replaces this fixed date with a rolling five-year deferral for investments made after January 1, 2027. This standardized approach makes the program far more equitable and easier to explain to prospective investors, who will receive a consistent five-year deferral regardless of when they invest.
Basis Step-Up Provisions
The OBBBA simplified the basis step-up provisions. Investments held for five years now receive a 10% reduction in the deferred gain, meaning only 90% of the original capital gain will be recognized when the deferral period ends. The previous seven-year, 15% step-up has been eliminated.
The OBBBA created a new entity classification: the Qualified Rural Opportunity Fund (QROF). This is not simply a regular QOF investing in rural areas; QROFs must invest exclusively in rural zones (communities under 50,000 population) and receive enhanced benefits, including a 30% basis step-up at five years. The distinction matters for fund structuring and compliance.
New Designation Cycles
Current QOZ designations sunset at the end of 2026. Governors begin nominating new zones on July 1, 2026, with a 90-day nomination window subject to Treasury certification. New designations take effect January 1, 2027, and governors will redesignate every ten years thereafter. The OBBBA also tightened eligibility: qualifying tracts must now have median family income below 70% of area median (down from 80%) or poverty rates of 20% or higher with income capped at 125% of median.
The IRS issued Notice 2025-50 identifying 3,309 of the current 8,764 QOZs as rural areas eligible for enhanced benefits, including a reduced substantial improvement threshold of 50% instead of 100%.
Understanding the Two-Tier Entity Structure
Opportunity Zone investments involve two distinct entities: the Qualified Opportunity Fund (QOF) and the Qualified Opportunity Zone Business (QOZB). The QOF is where investor capital enters, a corporation or partnership that self-certifies via IRS Form 8996 and must maintain 90% of assets in qualified property. The QOZB holds the actual real estate, despite its name suggesting an operating business.
This structure allows multiple QOFs to invest in a single QOZB, giving sponsors flexibility to accept capital from their own fund and from investors with separately established QOFs. One critical limitation: a QOF cannot invest in another QOF.
Three Paths to Property Qualification
Section 1400Z-2(d)(2)(D) establishes three ways property can qualify for OZ benefits:
New Construction: Building on land acquired after the applicable start date requires only that improvements be more than an insubstantial amount. The threshold here is low; purchasing land for ten million dollars and constructing a one-million-dollar building satisfies the requirement.
Original Use: Property that has been vacant for three years or was vacant for one year prior to QOZ designation qualifies without any improvement requirement. This provision becomes particularly relevant for the 2027 redesignation; property vacant throughout 2026 will qualify under original use rules for newly designated zones. Investors can essentially acquire vacant buildings, lease them up, and capture full OZ benefits without spending anything on improvements.
Substantial Improvement: Existing operating property requires improvements equal to 100% of the building's adjusted basis (excluding land) within 30 months of acquisition. For rural zones under the OBBBA, this threshold drops to 50%. Capitalizable costs, including construction interest, attorney fees, and interim management expenses, count toward this requirement. The spending threshold is more achievable than many investors initially assume.
Cost Segregation: Maximizing Depreciation in OZ Investments
Cost segregation studies identify building components that qualify for accelerated depreciation under shorter MACRS recovery periods. Personal property typically depreciates over 5-7 years while land improvements recover over 15 years, compared to 27.5 years for residential rental property or 39 years for commercial buildings.
The OBBBA permanently restored 100% bonus depreciation under Section 168(k) for qualified property acquired and placed in service after January 19, 2025. Critically, the acquisition date is determined by when a binding contract was executed; property under contract before January 20, 2025, does not qualify for 100% bonus even if placed in service later. Components identified through cost segregation can be fully deducted in the year placed in service, creating substantial first-year tax benefits.
For OZ investments, cost segregation becomes particularly powerful because of two critical features unique to the program: the zero-basis rule and the elimination of depreciation recapture.
Navigating the Zero-Basis Challenge
Under Section 1400Z-2, investors in QOFs begin with zero tax basis in their investment because they have deferred recognition of their capital gain. This creates an immediate challenge: without basis, investors cannot claim depreciation losses against other income.
The solution comes through qualified non-recourse financing. Debt allocable to partners under Section 752 provides basis for depreciation purposes. Experienced OZ sponsors structure their deals with appropriate leverage levels that give investors sufficient basis to absorb the accelerated depreciation generated by cost segregation studies. The financing also enables refinancing events that return capital to investors well before the ten-year hold concludes.
Permanent Elimination of Recapture
The most powerful aspect of combining cost segregation with OZ investments is the permanent elimination of depreciation recapture. Under Section 1400Z-2(c), investors who hold their QOF interest for at least ten years may elect to step up their basis to fair market value upon sale.
Treasury regulations confirm this step-up eliminates both appreciation taxes and depreciation recapture, including any gain attributable to ordinary income assets. This transforms cost segregation from a timing strategy, where accelerated deductions must eventually be repaid through recapture, into a permanent tax benefit.
It's important to note that the OBBBA added an important limitation: the basis step-up freezes at fair market value on the investment's 30th anniversary. Any appreciation after year 30 becomes taxable, preventing indefinite tax-free growth.
Consider a three-million-dollar OZ property with one million dollars in improvements. A cost segregation study identifying 30% of improvements as short-life property generates approximately $300,000 in bonus depreciation. At a 37% tax rate, that creates over $111,000 in immediate tax savings. Under traditional real estate ownership, this depreciation would be recaptured at sale at rates up to 25%. In an OZ held for ten years, the recapture obligation disappears entirely.
The Triple Tax Benefit Structure
Consider a group of investors who pooled $6 million to develop a 92-unit mixed-use property in a designated Opportunity Zone. They secured $12 million in construction financing, bringing total project costs to $18 million.
By investing their capital gains through a QOF, they deferred $2.2 million in immediate taxes (assuming 37% bracket). With the project now complete, RE Cost Seg's analysis projects $4.2 million in bonus depreciation, a paper loss equaling approximately 70% of their initial investment.
This $4.2 million deduction offsets other income dollar-for-dollar, reducing their current tax bills by $1.55 million. Any unused losses carry forward indefinitely. After 10 years, when the property value reaches $30 million, the $12 million appreciation is completely tax-free.
The Opportunity Zone structure eliminates both appreciation taxes and depreciation recapture after the 10-year hold. That $4.2 million in accelerated depreciation becomes a permanent tax benefit, never subject to recapture. Combined with tax-free appreciation, investors effectively transform a $6 million investment into $30 million of tax-free wealth.
Implementation Considerations
Timing matters significantly for OZ cost segregation strategies. Studies should be completed after improvements are substantially finished but before filing that year's tax return to capture maximum first-year deductions.
The OBBBA added significant compliance requirements under new Code Sections 6039K and 6039L. QOFs and QOZBs face detailed annual reporting obligations with meaningful penalties: $500 per day up to $10,000 for standard funds, or up to $50,000 for funds exceeding $10 million in assets. These requirements create compliance risk that demands careful attention.
For properties already placed in service, Form 3115 (Application for Change in Accounting Method) allows investors to claim catch-up depreciation through a Section 481(a) adjustment. This permits a look-back study that captures previously unclaimed accelerated depreciation in a single tax year without amending prior returns.
Documentation requirements are substantial. Investors need purchase agreements showing basis allocation between land and building, improvement contracts with detailed scopes, architectural specifications, and construction invoices itemizing materials and labor. The QOF operating agreement should specifically address depreciation allocation among investors.
Strategic Planning for the 2026-2027 Transition
Investors in OZ 1.0 need to understand what they actually have. Anyone who invested after December 31, 2021, receives zero basis step-up; that benefit has already expired. The only remaining benefit is deferral, which ends December 31, 2026, when the deferred gain becomes taxable regardless of whether the investment is sold. There is no sugar-coating this reality.
Investments made after January 1, 2027, receive the full OZ 2.0 benefits: five-year deferral, 10% basis step-up (30% for QROFs), and tax-free appreciation after ten years. Sophisticated sponsors are already preparing 2027 funds, accepting commitments throughout 2026 for capital calls in January 2027.
For investors with capital gains recognized in late 2026, waiting until January 2027 to invest captures substantially better treatment. The 180-day investment window under Section 1400Z-2(a)(1)(A) provides flexibility for year-end gains. Investing a late-2026 gain under the old rules makes little economic sense.
Making the Strategy Work
The combination of Opportunity Zones and cost segregation delivers maximum value when investors commit to the ten-year hold required for tax-free appreciation and recapture elimination. Properties with substantial improvement potential in designated zones create ideal conditions for both strategies.
The OBBBA's permanent extension of both programs removes the uncertainty that previously complicated long-term planning. Investors can now structure deals with confidence that the rules will remain stable throughout their hold period, a significant improvement over the original temporary provisions.
Real estate professionals considering this strategy should work with CPAs experienced in both OZ compliance and cost segregation implementation. The technical requirements for QOF certification, substantial improvement documentation, and proper depreciation elections demand specialized knowledge that many general practitioners lack.
For investors willing to deploy patient capital in economically distressed communities, the tax benefits have never been more compelling. The combination of deferred recognition, basis step-up, tax-free appreciation, accelerated depreciation, and eliminated recapture creates a multi-layered approach that can meaningfully reduce effective tax rates compared to conventional real estate investments.
R.E. Cost Seg provides a comprehensive analysis ensuring maximum benefit capture. Our studies withstand IRS scrutiny while delivering average first-year tax savings exceeding $200,000 per million invested.
Frequently Asked Questions
Can I invest retirement account funds in Opportunity Zones?
Qualified retirement accounts (IRAs, 401(k)s) are already tax-advantaged and cannot benefit from OZ deferral. OZ investments make sense for taxable capital gains, not tax-deferred accounts.
What if I need to exit before ten years?
Investors who exit before ten years forfeit the tax-free appreciation benefit and trigger recognition of their deferred gain. However, they retain any depreciation benefits claimed during ownership (subject to normal recapture rules). Early exit isn't prohibited; it simply reduces tax benefits.
Do I need to invest my entire gain?
No. Unlike 1031 exchanges, Opportunity Zone investments can address any portion of a qualifying gain. Invest $500,000 of a $2 million gain, and you defer tax on $500,000 while recognizing the remainder.
What happens if the property is in an OZ that loses designation?
Investments made while a census tract is designated maintain their OZ status regardless of subsequent redesignation. The designation is locked at the time of investment.
Can I do cost segregation on an OZ property I've owned for several years?
Yes. Form 3115 allows catch-up depreciation through a Section 481(a) adjustment. You can claim all previously missed accelerated depreciation in a single year without amending prior returns.
How do I find Opportunity Zone census tracts?
The IRS maintains an official list. Multiple online mapping tools allow searching by address. Any property transaction should confirm OZ status through official sources, not third-party maps alone.
