Qualified Rural Opportunity Funds Are Set to Boost U.S. Heartland

But a noticeable change to the new and improved program is its preference for rural opportunity zones. This, combined with other economic policies and industry trends, may be part of a larger attempt to “make rural America great again.”

Under current law, investors can defer capital gains by reinvesting them into QOFs, with deferral lasting until Dec. 31, 2026. Those who invested before Dec. 31, 2021, also may qualify for certain basis step-ups, and all investors can benefit from full exclusion of post-investment appreciation if the QOF interest is held for at least 10 years, assuming other requirements are met.

Beginning in 2027, new QOF investments will qualify for a rolling five-year deferral period and a simplified basis step-up: 10% after five years, plus full exclusion of any additional appreciation.

The new tax law also introduces qualified rural opportunity funds, or RQOFs, which offer enhanced benefits—including a 30% basis step-up after five years and a reduced 50% substantial improvement requirement, meaning fewer dollars must be spent improving assets compared with standard QOFs. These changes reflect a clear policy shift toward encouraging rural investment through the QOZ program.

The new law’s enhancements for RQOFs may significantly lower barriers for large-scale, capital-intensive projects in rural areas—most notably hyperscale data centers. These facilities, which power the digital economy by processing and storing vast quantities of information, demand enormous parcels of land, stable and affordable electricity, and long-term investment certainty.

With the new 30% basis step-up after five years—available only to RQOFs—along with the permanent, rolling five-year deferral of capital gains, the economic case for building data centers in designated rural opportunity zones becomes far more compelling.

Rural land already plays a key role in the data center landscape, thanks to its lower real estate and development costs, as well as access to affordable renewable energy sources such as wind and solar. Rural areas also typically have fewer zoning restrictions and more flexible permitting timelines, which can accelerate project development.

RQOFs make these regions even more attractive to investors and developers by improving after-tax returns on long-horizon infrastructure projects. For example, a data center campus requiring hundreds of millions in capital outlay may now be structured through an RQOF vehicle, providing investors with powerful tax deferral and exclusion benefits, which may help offset rising costs in construction materials and labor.

These same incentives can drive the onshoring of advanced manufacturing into rural communities. Facilities such as semiconductor fabrication plants, precision-machining centers, and next-generation battery or electric vehicle component factories often require years of planning and billions of dollars in capital.

By reducing the “substantial improvement” threshold from 100% to 50% for RQOFs, the new tax law allows developers and manufacturers to spend proportionally less of their capital on qualifying improvements while still benefiting from tax advantages of the opportunity zone framework. Combined with the 30% step-up and appreciation exclusion, these provisions lower the effective tax rate on long-term manufacturing investments and enhance project internal rates of return.

As the U.S. government and private sector seek to build resilient domestic supply chains and reduce reliance on foreign manufacturing, RQOFs could provide the investment vehicle needed to bring industrial production back to the country’s heartland.

Beyond heavy industry, the revised QOZ program also opens new avenues for investment in rural agriculture and critical infrastructure. Historically, private capital has been reluctant to fund rural agricultural improvements due to low near-term returns and high capital requirements. RQOFs change this dynamic.

The more favorable tax treatment may now encourage investors to fund modern irrigation systems, large-scale cold-storage distribution hubs, and on-farm renewable energy assets such as solar panels, anaerobic digesters, or small-scale wind turbines. These improvements make agricultural operations more efficient and resilient—and they align with broader environmental, social and governance goals favored by institutional investors.

The RQOF framework also supports investments in regenerative farming practices, which promote soil health and long-term sustainability. Examples include cover-crop rotation systems, no-till farming equipment, carbon sequestration protocols and composting facilities—all of which reduce environmental impact while enhancing yields over time. RQOFs could serve as a vehicle to scale these techniques, pairing climate-forward practices with long-term tax incentives.

Some rural opportunity zones also may allow for investments in water infrastructure—including irrigation canals, water reuse systems and stormwater runoff mitigation—which have traditionally fallen outside the purview of private investment. By treating such infrastructure as investable assets under the QOZ rules, the new law could catalyze upgrades to water systems that are vital to both agriculture and rural population centers.

Together, these enhancements reflect a clear policy shift: using tax incentives to channel private capital into underserved rural communities, supporting everything from high-tech industry to sustainable farming. The QOZ program is no longer just a tool for urban redevelopment or gentrification.

We’ll have to wait and see whether this strategy will succeed in revitalizing rural America. But with the now-permanent structure of the QOZ program and the generous new RQOF provisions, rural regions could play a pivotal role in the country’s next phase of economic development.

Reproduced with permission. Published 08/12/25. Copyright 2025 Bloomberg Industry Group 800-372-1033. For further use please visit https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/