The Qualified Opportunity Zone (“QOZ”) program was created in 2017 as part of the Tax Cuts and Jobs Act, with the goal of incentivizing economic growth and investments into distressed communities through tax benefits. For the commercial real estate industry, it seemed to hold tremendous potential, but some unfortunate stumbling blocks hindered its full success. Now, with the TCJA expiring and Congress looking to a new large-scale tax bill, the program has a chance for a new—and improved—second chance.

First, some background: broadly, the QOZ program worked by allowing investors to invest in designated zones via an “Opportunity Fund.” The key incentive was that if an investor put capital gains into a Opportunity Fund within 180 days of a sale, they were eligible for deferral of the federal tax while held in the fund; a 10% reduction in the capital gains tax if held for five year, and an additional 5% reduction after seven; and gains accrued while in the fund are tax-free if the initial investment was held for ten years. Additional requirements include that 90% of a fund’s assets must be in QOZ property; business property acquired by a fund must be new or “substantially improved”; and qualifying property could be stock, partnership interests, or other tangible property used in a trade or business (e.g., real estate).

On paper, this seems like a slam-dunk—investors should have been flocking to the funds and money pouring into the underserved communities that were designated. So, what were the issues? First, the program had a built-in timeline—investors only had until the end of 2026 to meet the 5- or 7-year requirements to reduce the capital gains tax they deferred on their investments into the fund. Effectively that meant to reap the full benefits of the program they had to invest by the end of 2019, or just two years after the program was created. Further, the IRS and Treasury Department rulemaking process was slow, and many investors were hesitant to participate without knowing all the details and regulations involved. Finally, the zones (low-income census tracts nominated by the states) had winners and losers—investment money was much more likely to go into an urban zone than a rural one, and for some zones the low-income designation was the result of, for example, a large college student population.

This is not to say that the program wasn’t utilized, or that there haven’t been investments and improvements in QOZs as a result of it—just that its potential far exceeded the results.

The House’s tax package—the “One Big Beautiful Bill”—reestablishes the program for a new round of investment from 2027–2033, and gives states an opportunity to designate new census tracts as QOZs. It would shift the focus of new QOZ designations to create a more even playing field, requiring at least one-third to be in rural areas. To further incentivize rural investments, it provides a higher capital gains reduction—30% for investments in rural funds, compared to the max 10% in general funds. Finally, the definition for newly designated zones requires a poverty rate of at least 20% or a median family income of no more than 70% and excludes census tracts where the median family income is 125% or more than the area median family income. On the downside for investors, for non-rural fund investments there would no longer be an additional 5% reduction in capital gains for holding the investment for seven years, and there would be additional reporting requirements.

While the final version of the tax bill still has a ways to go and likely many changes from what is in the House version, seeing attention paid to the QOZ program is a good sign for both for those who wanted to participate originally and missed their chance and for the communities that were overlooked or didn’t get the full benefit the first time around.