Changes in 2025 to the Opportunity Zones (OZ) tax-incentive initiative present an opportunity for local leaders, community-based organizations, investors, and state and local agencies to shape a new decade of place-based investments in low-income communities. Communities are preparing now for what many call “OZ 2.0.”
What are Opportunity Zones?
Created in 2017, Opportunity Zones were designed to incentivize long-term private investment in low-income census tracts to help spur economic growth and create jobs. Investors who reinvest eligible capital gains into specific qualifying funds receive tax benefits, including deferral of taxes on the original gain and, after a 10-year holding period, exclusion of appreciation on the new investment.
Investments estimated at more than $100B nationwide made through the original OZ program, now referred to as OZ 1.0, have supported a range of activities, the most common of them in real estate, including multifamily housing development. Research has found these investments tended to cluster in urban and already-improving neighborhoods, with relatively modest activity in rural areas and more economically distressed places.
The new Opportunity Zones program, dubbed OZ 2.0, offers investors a chance to leverage greater investments in these areas.
Opportunity Zones 2.0: Changes at a glance
- Permanent program with a rolling five-year deferral starting in 2027.
- New OZ designations in 2026 using a stricter low-income definition; 1.0 zones sunset, new ones designated.
- Stronger rural incentives, including lower improvement requirements and larger basis step-ups under an expanded “rural” definition.
- New federal reporting to provide clearer, community-level insight into investment activity and outcomes.
What’s new under Opportunity Zones 2.0?
Opportunity Zones 2.0 includes the following updates, with notable implications for how communities plan and engage around OZs moving forward:
- Now it’s permanent. While OZ 1.0 ends in 2026, OZ 2.0 is permanent. Starting January 1, 2027, investments qualify for a rolling five-year deferral—meaning capital gains reinvested at any point can access the incentive without a “use it or lose it” deadline, which can aid investors and communities in longer-term planning.
- New OZ census tracts will be designated. Beginning July 1, 2026, governors will have 90 days (plus a possible 30-day extension) to nominate new OZs. They can select up to 25% of eligible low-income tracts in their respective states. Notably, these designations as “opportunity zones” will last for 10 years. To qualify as “low-income” under OZ 2.0, tracts must have either:
- a median family income at or below 70% of the area median (instead of 80% in 1.0), or
- a poverty rate of at least 20% and median income at or below 125% of the area median income.
This definition means there will be fewer eligible tracts, and that some 1.0 tracts will sunset while others will be newly eligible.
- Investors have stronger incentives for investing in rural communities. Two targeted enhancements create greater incentives for investments in rural areas. The first relates to the “substantial improvement” provision, which is meant to ensure OZ Funds acquiring properties undertake meaningful improvements. OZ 2.0 reduces the requirement from 100% (i.e., investing the equivalent of the property’s basis, excluding land, for renovations or new construction) to 50%. Second, the standard five-year basis step-up increases from 10% to 30% for rural OZ Funds.
- The definition of “rural” also changed to include any place other than a city or town of more than 50,000 residents and any adjacent urbanized area, meaning a significant share of US communities may now qualify.
- New reporting requirements will yield local-level insights. Under OZ 2.0, the US Department of the Treasury will publish annual reports on program scale, investment patterns, and community-level outcomes, along with two deeper socioeconomic assessments during each decade-long designation period. These new requirements give communities and residents more insight into how capital is flowing and whether it aligns with local goals.
For community-based organizations, local governments, and CDFIs, these updates open meaningful opportunities to shape both the geography of OZ designations and the resulting investments.
A core lesson from OZ 1.0 is that communities that cultivated strong partnerships, articulated a clear vision, and organized pipelines of feasible projects were better positioned to attract investments through the initiative.
To best prepare for the launch of OZ 2.0 in 2026, local community development organizations can:
- Convene and connect. One learning from 1.0 is that strong OZ investments often emerged when local organizations acted as connectors, bringing together entrepreneurs, developers, anchor institutions, and potential investors. Formal convenings, forming advisory teams, mapping local assets, identifying redevelopment opportunities, and ongoing relationship-building can help channel private capital toward community priorities.
- Build investment-ready pipelines. One barrier in OZ 1.0, especially in rural areas, was the lack of projects positioned for due diligence. Communities can address this now by supporting feasibility studies, predevelopment work, site control, and education about how OZ equity fits within a broader capital stack. While OZ equity cannot turn weak projects into strong ones, it can close feasibility gaps for deals that are nearly viable.
- Elevate community perspectives in tract nominations. The July 2026 designation period gives communities a chance to get involved. Articulating local priorities, identifying priority sites, and engaging state officials early can help ensure new OZ maps reflect community goals and long-term development strategies.
- Strengthen cross-sector collaboration. Community organizations can help foster the necessary collaboration among public agencies, philanthropy, financial institutions, community groups, and local governments to help align existing incentives and ensure OZ investments advance community development priorities.
These actions can help localities make sure they are ready with community-driven, investable options when OZ 2.0 launches.
Opportunity Zones 2.0 timeline
July 4, 2025
OBBBA signed into law OZs made permanent
September, 2025
50% substaintial improvement threshold rule takes effect
Q1, 2026
ACS released updated data
Governors have up to 90 days to nominate up to 25% of the state’s low-income census tracts.
July 1, 2026
Official designation period begins
Governors have up to 90 days to nominate up to 25% of the state’s low-income census tracts.
December, 2026
Treasury issues final list of tracts
OZ 1.0 Benefits expire on December 31, 2026
Two year period where both the original OZ 1.0 tracts and the new OZ 2.0 tracts are simultaneously eligible for investment
January 1, 2027
OZ 2.0 Benefits officially take effect
- Rolling Deferral: rolling 5 year deferral from the date of investment
- Standardized Step-up: 10% basis step-up after 5 years
- Rural Bonus: qualifying investments get 30% basis step-up after 5 years
Treasury required to issue annual reports for summarizing program scale and investment
Two year period where both the original OZ 1.0 tracts and the new OZ 2.0 tracts are simultaneously eligible for investment
December 31, 2028
OZ 1.0 tract designations expire
2031
Treasury will issue public reports assessing socioeconomic performance of OZ vs non-OZ tracts
July 1, 2036
Decennial Re-Designation every 10 years ending in ‘6’
What comes next?
In the coming months in mid-2026, Fed Communities and Regional Reserve Banks across the Federal Reserve System will share additional perspectives, tools, and research to help practitioners navigate OZ 2.0, starting with a webinar hosted by the Federal Reserve Bank of San Francisco on May 20, 2026. Tune in to learn more about what communities can do now to prepare for and make the most of OZ 2.0’s investment potential.
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Jason Vargo is a senior researcher in community development at the San Francisco Fed.
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Elizabeth Kneebone is assistant vice president of research in Community Engagement and Analysis at the Federal Reserve Bank of San Francisco.
