Revitalizing Opportunity: How “The One, Big, Beautiful Bill” Aims to Reform and Renew Opportunity Zones

The Bill, as released by the House Ways & Means Committee, would create a new iteration of the program (OZ 2.0) that both excites and frustrates proponents of the program. It is a first draft, subject to the legislative process, that retains the core of OZ 1.0, but with several twists, some in response to criticisms leveled against OZ 1.0 and some to address a revised slate of priorities.

This article provides an introduction to Section 111102 of the House Ways & Means Committee’s proposed tax package, which introduces OZ 2.0, and discusses how this Bill, if adopted, might renew, refine and enhance the effectiveness and accountability of the OZ 1.0 initiative through several structural reforms, expanded eligibility rules, and incentives for rural investment.

I.  Renewing and Expanding Opportunity Zone Designations

The One, Big, Beautiful Bill authorizes a new round of OZ designations beginning on January 1, 2027, and sunsetting on December 31, 2033, by which time all deferred gains must be taken into income. Under OZ 2.0, states will nominate additional census tracts for inclusion. However, the Bill limits these new designations to no more than 25% of eligible low-income census tracts in a state. Importantly, it mandates that a significant portion of these new designations—at least 33% or all eligible rural areas if rural areas account for less than 33% of tracts that meet the criteria—must be located in entirely rural communities.

The inclusion of this rural investment mandate is a significant shift in strategy. While early OZ 1.0 investments included rural areas, the proposed OZ 2.0 changes signal a specific and concerted focus on rural revitalization—and a relative disinvestment in urban areas, which received substantial benefits and attention from OZ 1.0.

OZ 2.0 does not renew the existing program, and the December 31, 2026, sunset for tax deferral benefits under OZ 1.0 is retained. Existing designated census tracks are not eliminated but, unless included in the new 2027 list, are not eligible for further investments. These policy choices have disappointed those who wanted more time to complete projects commenced under OZ 1.0 using additional deferred capital gain investments and those who hoped for a rolling or perpetual program. They also create a “dead zone” in which new projects must wait for the new designations and for the January 1, 2027, start date, which will likely delay commencement of OZ 2.0 projects.

II. Redefining Low-Income Communities

At the heart of Section 111102 is a more targeted definition of “low-income communities”—the basis for qualifying Opportunity Zones. This new definition refines eligibility by excluding census tracts where median family income exceeds 125% of the state or metropolitan median, depending on whether the tract is rural or urban. This change aims to ensure that OZ designations are focused strictly on economically distressed areas and not diverted to already-prosperous regions with access to capital investment.

The Bill also adjusts the eligibility formula used to determine whether a census tract qualifies, narrowing eligibility to census tracts with a poverty rate of at least 20% or a median family income that does not exceed 70% of the area median income. These tweaks are designed to sharpen the focus on genuinely underserved communities.

These choices respond to some critics who contended that the benefits of OZ 1.0 were not adequately targeted to communities that the original program was proclaimed to assist. The effect should be to reduce the number of census tracts that will qualify for benefits under OZ 2.0 and arguably focus the program more effectively on areas meeting its stated goals.

III. Investment Incentives and Adjustments

The Bill proposes extended and adjusted tax incentives for investors. Notably, those investing in Opportunity Zones after December 31, 2026, under OZ 2.0 would be eligible for a single 10% step-up in the basis of their investment if held for at least five years. For investments in designated Qualified Rural Opportunity Funds, this benefit is increased to a 30% increase in basis. Qualified Rural Opportunity Funds must invest at least 90% of their assets in rural OZ properties or businesses.

Another key feature is a new provision that allows taxpayers to defer tax on up to $10,000 in ordinary income under simplified rules (but without a step-up opportunity), a move clearly intended to make the program more accessible to smaller and non-institutional investors, but which perhaps will prove inadequate to move the needle in a material way.

An additional feature is a new rule that lowers the threshold for being deemed, in rural areas, to have effected a “substantial improvement” of existing structures—from 100% of adjusted basis of qualifying properties (the standard applicable in other areas) to 50%, making it easier for rural projects to obtain OZ 2.0 benefits.

On the other hand, many commentators asked for program changes to make it more accommodating to fund-of-funds or other diversified vehicles and for a restoration of the 15% step-up benefit that was originally included under OZ 1.0 but expired on December 31, 2019 (during the early years of the program). These concepts are absent in OZ 2.0.

IV. New Reporting Requirements

In response to criticism that the OZ 1.0 program lacked transparency and measurable impact, the Bill introduces enhanced reporting obligations for Qualified Opportunity Funds and businesses. Although the details of these requirements are extensive, it suffices to say they are designed to improve federal oversight, track community outcomes and prevent abuse of the tax benefits.

V. A Strategic Shift to Enhance Accountability and Targeting

The combined effect of these reforms reflects a strategic shift in the OZ program’s design to a less urban-centric focus and with metrics that, on their face, may enhance the accountability, targeting and effectiveness of the OZ initiative.

The prioritization of rural zones and the restriction of designations to attempt to impact genuinely low-income areas illustrate the Bill’s intent to respond to perceived flaws in the original program—chief among them being that investment often flowed into neighborhoods that were already receiving significant investments, leaving many of the most distressed communities behind. In the current climate of higher interest rates and a more turbulent capital-raising environment, OZ 2.0, even in its initially proposed form, represents a policy that could enable and enhance investment in the communities targeted.

VI. Conclusion

While it remains to be seen how these change from OZ 1.0 to OZ 2.0 will play out in practice, the legislative intent is clear: to make Opportunity Zones work better for the people they were originally designed to serve. How it will mutate as the Bill proceeds to legislation is a matter to be written, but it is widely considered to be a positive and good-faith first step, one that, if proposed on a stand-alone basis, might well garner bipartisan support.

Interesting questions arising from this initial proposal include: What is the future of development in rural areas? In particular, what, if anything, does this mean for the location of data centers within the United States? Will the rural development resulting from the new program be welcome in the rural communities affected?

Pillsbury Winthrop Shaw Pittman is proud of its involvement to date in the OZ 1.0 initiative and looks forward to working with clients on this potential new iteration of the program.