Feds Release New Guidance For Rural Opportunity Zone Tax Benefit

While the second iteration of the opportunity zone program is still more than a year away from launching, the federal government released new guidance for a rural benefit that investors can take advantage of today. 

The Department of the Treasury and the IRS issued new guidance that defines which tracts now qualify as rural opportunity zones, totaling 3,309 tracts and roughly 38% of the OZ map. 

The IRS said a rural area is defined as any census tract that isn't in a city or town with a population greater than 50,000 or isn't an urbanized area adjacent to a city or town of that size. 

As part of the One Big Beautiful Bill Act, the Treasury and IRS made changes to the rural substantial improvement provision of the opportunity zone program. The program previously required investors renovating a property to invest 100% of the asset's basis to receive the OZ tax benefits, but as of the law that became effective July 4, they are now only required to invest 50% of the basis.  

"This makes buy-and-rehab strategies viable for far more properties in rural areas," Savoy Equity Partners co-founder Barrett Linburg said in a social media post. "No more guesswork on which tracts qualify—Treasury provided the official list."

The new guidance was shared during the "Great Lakes Region OZ 2.0 Launch Event" hosted by the Department of Housing and Urban Development on Tuesday afternoon in Chicago.

"It's incredibly important that we get this right," Jim Barham, acting chief innovation officer for the Department of Agriculture's Rural Development Innovation Center, said during the event. 

Investments deemed substantial improvements under the provision include capitalized costs, brokerage fees, attorney fees and hard costs of physical renovations.

Barham said that for an opportunity zone to qualify as rural, it can't overlap with an urban designated area whatsoever. He said there isn't a fully updated map, as the Treasury is waiting on the 2020 to 2024 American Community Survey data release in December.

"We will have new income data, we will have new poverty data and we will have new census tract data," Barham said.

The IRS said it would be coming out with new guidance for the entirety of the program in the coming months.

The opportunity zone program was created under the Tax Cuts and Jobs Act of 2017 as an economic development tool to generate investment in real estate projects and businesses in low-income areas. Governors nominated 8,764 qualified census tracts in the program’s first iteration, but it was scheduled to sunset at the end of next year. 

The second iteration of the program, created with the OBBBA, is set to begin on Jan. 1, 2027, after governors nominate new census tracts.

OZ 2.0 has a bigger focus on rural and distressed communities. Legislators tightened the income threshold for the program to 70% of the area median income from 80%, and they allowed a 30% step-up in basis after 10 years for qualified rural opportunity funds, compared to 10% for other zones.

The federal government expects the new map to be 20% smaller than the current map, given the updated requirements.

The program will also roll out new reporting and data collection on the economic impacts and development in opportunity zones. The new program also allows investors to use $10K of ordinary income per year for investment, whereas the previous version only allowed investors to use capital gains.