Two Tax Programs, One Goal, Very Different Mechanics
Opportunity Zones and New Markets Tax Credits both aim to drive private investment into low-income communities. They work differently, serve different investors, and can be combined on the same project. **Opportunity Zones** let investors defer and potentially eliminate capital gains taxes by investing in designated census tracts through Qualified Opportunity Funds. Created by the Tax Cuts and Jobs Act of 2017. Made permanent by the OBBBA in July 2025. An estimated $112-150 billion in total QOF investment since inception (Novogradac estimate). Most investment has gone to real estate rather than operating businesses. No application — investors self-certify by filing IRS Form 8996. **New Markets Tax Credits** give investors a 39% federal tax credit over 7 years for equity investments made through Community Development Entities into projects in low-income communities. Created in 2000. Made permanent at $5 billion per year by the OBBBA. Over $81 billion in cumulative allocation authority. Requires applying to the CDFI Fund for allocation authority. The audiences are different too. OZ appeals to individual and institutional investors with capital gains to defer. NMTC appeals to sophisticated financial institutions, CDFIs, and tax credit syndicators. But for developers and project sponsors, understanding both programs is essential because they can stack on the same deal.
Opportunity Zones: The December 2026 Deadline
If you invested capital gains in a Qualified Opportunity Fund before 2027, the original TCJA rules still govern your investment. The most important date: **December 31, 2026** triggers three events simultaneously: 1. **Mandatory deferred gain recognition.** All investors who deferred capital gains under OZ 1.0 must recognize and pay tax on remaining deferred gains as of this date, regardless of whether they have sold their QOF interest. 2. **Current QOZ designations expire.** The existing 8,861 designated Opportunity Zone census tracts formally sunset (moved up from 2028 by the OBBBA). 3. **Old basis step-up rules end.** The two-tier step-up structure (10% at 5 years, additional 5% at 7 years) is replaced by simplified rules for new investments. **What does NOT expire:** The Opportunity Zone program itself. It is now permanent. New zone designations and new investment rules take effect January 1, 2027. **Practical impact:** Investors who put gains into QOFs in 2020 or later cannot reach a 7-year hold before the December 31, 2026 mandatory recognition, so the 15% step-up is effectively unavailable. The 10% step-up at 5 years applies only to investments made in 2021 or earlier. The 10-year exclusion on new gains (appreciation within the QOF) remains the primary benefit for long-term holders. If you hold your QOF interest for 10+ years, all appreciation during that period is excluded from taxable income when you sell.
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OZ 2.0: What the OBBBA Changed
The One Big Beautiful Bill Act, signed July 4, 2025, made seven major changes to the Opportunity Zone program. **1. Permanent extension with decennial redesignation.** Governors must redesignate QOZs every 10 years within a 90-day window beginning July 1 of each redesignation year. No more expiration dates. **2. Simplified basis step-up.** For investments made after December 31, 2026: 10% basis step-up at 5 years (retained), but the additional 5% at 7 years is eliminated. The 10-year full-exclusion of new appreciation remains. **3. Rolling 5-year deferral.** Under OZ 2.0, new investments get a rolling 5-year deferral from the investment date, rather than all deferrals ending on a single fixed date. **4. 30-year investment cap.** For QOF investments held beyond 30 years, the basis step-up is capped at the fair market value on the 30th anniversary. Gains after that are not eligible for exclusion. **5. Narrower tract eligibility.** The OBBBA restricts which census tracts can be nominated, directing redesignation toward more genuinely distressed communities. **6. Qualified Rural Opportunity Funds (QROFs).** An entirely new fund class with enhanced benefits for rural investments (see below). **7. Mandatory reporting.** New annual reporting for QOFs and QOZ Businesses, with penalties of $500/day (max $10,000 per return, or $50,000 for large QOFs). Applies to tax years beginning after July 4, 2025. Most changes take effect January 1, 2027. The reporting requirements apply starting with 2026 tax returns filed in 2027.
Rural Opportunity Zones: Triple the Basis Step-Up
The most significant new feature of OZ 2.0 is the Qualified Rural Opportunity Fund. QROFs receive substantially enhanced benefits for investing in rural areas. **Definition of rural:** Any area not in or immediately adjacent to a town with a population of 50,000 or more. **Enhanced benefits:** - **30% basis step-up at 5 years** (versus 10% for standard QOFs — triple the benefit) - **50% substantial improvement threshold** (versus 100% for standard OZ property — you need to invest half the property's purchase price in improvements rather than matching it dollar for dollar) - Must invest at least 90% of assets in rural OZ tracts Of the 8,861 current OZ census tracts, approximately 23% are in rural areas. 294 include Native American lands (see our tribal grants guide for related programs). 32 million people live in current OZ tracts nationwide. The QROF structure is designed to address the concentration problem that has defined OZ 1.0: the top 1% of OZ tracts received approximately half of all investment, and less than 2% of QOF equity went to operating businesses rather than real estate. Rural areas received minimal investment. Whether enhanced QROF benefits change this pattern remains to be seen.
How to Set Up and Invest in a QOF
**Setting up a QOF requires no IRS pre-approval.** Any corporation or partnership can self-certify by: 1. Organizing as a corporation or partnership under U.S. state law 2. Filing IRS Form 8996 (Qualified Opportunity Fund) with the entity's annual tax return 3. Holding at least 90% of total assets in Qualified Opportunity Zone property (the "90% asset test") The 90% test is measured as the average of two testing dates: the last day of the first 6-month period and the last day of the tax year. Failure triggers monthly penalties on the shortfall amount. **For investors:** You have 180 days from realizing an eligible capital gain to roll it into a QOF. Only capital gains qualify — ordinary income does not. The investment defers the original gain; appreciation within the QOF can be permanently excluded after 10 years. **Scale of the market:** Approximately 7,800 QOFs filed Form 8996 returns for tax year 2020 (the most recent Treasury data). Novogradac estimates total QOF equity raised at $112-150 billion as of early 2026. Funds range from $5 million single-asset vehicles to $1 billion+ institutional funds. Less than 2% of equity has gone to operating businesses; the vast majority funds real estate development. **Estate planning note:** QOF interests do not receive a step-up in income tax basis at death. The deferred gain transfers to the heir as income in respect of a decedent. However, the heir inherits the original holding period for 5/10-year calculations. **For broader context on registering for government opportunities in designated zones, see our SAM.gov guide.**
New Markets Tax Credits: Now Permanent at $5 Billion Per Year
The OBBBA permanently authorized the NMTC program at **$5 billion in annual allocation authority**. The program had been reauthorized eight times since 2000 and was set to expire at year-end 2025. The NMTC Coalition projects permanency will drive $100 billion in community investment over the next decade. **How NMTC works:** A tax credit investor makes an equity investment into a Community Development Entity (CDE). The CDE makes a Qualified Low-Income Community Investment into a project — typically a below-market-rate loan to a business or development in a low-income community. The investor receives a **39% federal tax credit** over 7 years: 5% in each of years 1-3 and 6% in each of years 4-7. Because the project typically repays the investor's principal through loan payments at the end of the 7-year compliance period, the effective subsidy to the community project is substantial. The NMTC generates approximately $8 in private investment for every $1 in federal tax expenditure. **The CY 2024-2025 round was a record:** $10 billion in allocation authority awarded to 142 organizations nationwide (announced December 23, 2025). Since 2000, the CDFI Fund has completed 20 allocation rounds totaling $81 billion in cumulative authority, funding over 8,500 projects. **Typical NMTC deal:** $5-50 million project size ($15-25 million is the sweet spot). Transaction costs generally make projects under $5 million uneconomical. Common project types: manufacturing facilities, healthcare clinics, grocery stores in food deserts, community facilities, schools, and mixed-use developments. **Who applies:** CDEs apply to the CDFI Fund for allocation authority. Project sponsors work with CDEs that have allocation. You do not apply for NMTC directly — you find a CDE partner with available allocation.
CDFIs: The Institutions That Make NMTC Work
Community Development Financial Institutions are the primary vehicles for NMTC allocation and broader community development lending. **CDFI certification requirements:** 1. Must be a legal entity (corporation, partnership, cooperative, credit union, etc.) 2. Primary mission of serving economically distressed communities 3. Must provide financing (loans, equity, guarantees) 4. Must primarily serve an eligible low-income target market 5. Accountability to target market through governance (board representation) 6. Cannot be government-controlled As of early 2026, there are approximately **1,375 certified CDFIs** in the United States. Credit unions make up the largest group (444). The rest includes banks, loan funds, community development corporations, and venture capital funds. **FY2026 CDFI Fund appropriation: $324 million** (level-funded from FY2025, despite an administration proposal to cut to $134 million). This funds the CDFI Financial Assistance and Technical Assistance programs, separate from NMTC allocation. **CDFI Bond Guarantee Program:** Treasury provides a 100% federal guarantee on bonds issued to CDFIs. Minimum bond size: $100 million. Maximum maturity: 30 years. Up to 10 bonds per year, capped at $1 billion annually. Nearly $3 billion guaranteed through early 2026. This is a zero-subsidy credit program — it does not require annual appropriations. For organizations working in community development finance, CDFI certification opens access to multiple Treasury programs beyond NMTC. For foundation funding of CDFIs, program-related investments (PRIs) from foundations are a growing capital source.
Stacking Tax Credits: OZ + NMTC + HTC + LIHTC
Sophisticated community development projects often combine multiple tax credit programs. Here is what stacks and what does not. **OZ + NMTC:** Legally permissible. A CDE can simultaneously qualify as a QOF, creating a hybrid entity. The investor defers capital gains under OZ rules while generating the 39% NMTC credit. The project must be in a census tract that qualifies under both programs (significant geographic overlap exists). Compliance periods differ: 7 years for NMTC, 5/10 years for OZ benefits. **OZ + Historic Tax Credits (HTC):** Structurally complex. The federal HTC provides a 20% credit on rehabilitation expenditures for certified historic structures. The complication: HTC requires a dollar-for-dollar basis reduction, but OZ investors start with zero basis. Common workaround: use an indirect structure where the QOF invests in a QOZB that participates in the HTC deal. 79% of historic tax credit rehabilitation expenditures occur in economically distressed areas, making HTC/OZ geographic overlap natural. **OZ + LIHTC:** Straightforward stacking. Low-Income Housing Tax Credits and OZ share significant geographic overlap. The QOF or QOZB can be the tax credit partnership in a LIHTC deal. Under the OBBBA, LIHTC was expanded: the 4% credit rate floor was made permanent and the 9% credit allocation was increased by 12.5%. **NMTC + LIHTC:** Do not stack on the same project (established restriction). **Clean energy credits in OZ projects:** IRA Section 48 and Section 45 credits remain stackable with OZ investments for projects begun before January 1, 2025. Post-OBBBA, technology-neutral credits for solar and wind end after December 31, 2027 for new facilities. See our IRA clean energy guide for current credit details.
Criticisms and the Evidence on Community Impact
The OZ program has attracted significant scrutiny about whether tax benefits for investors actually benefit distressed communities. **Investment concentration:** The top 1% of OZ tracts received approximately half of all investment. The top 5% received approximately 80%. Investment clustered in urban areas already experiencing growth momentum, not in the most distressed tracts the program targeted. **Academic research:** A University of California, Irvine study in the Journal of Urban Economics found at best modest positive effects on average earnings of zone residents and no evidence that Opportunity Zones reduce local poverty rates. **Real estate vs. economic development:** A March 2025 Economic Innovation Group report found OZ tracts added 313,000 residential units between Q3 2019 and Q3 2024, more than doubling the previous housing growth rate. But less than 2% of QOF equity went to operating businesses. Critics argue the program has functionally tilted toward real estate development rather than the operating-business investment Congress intended. **Gentrification risk:** Increased investment in historically underinvested neighborhoods raises property values, potentially displacing long-term residents — a documented concern in urban OZ tracts. The OBBBA addresses some of these criticisms through narrower tract eligibility, mandatory reporting, enhanced rural benefits through QROFs, and public reporting comparing economic performance of designated versus non-designated tracts. Whether these changes redirect investment remains to be seen — the new rules take effect in 2027. **Seven states offer additional state-level OZ incentives** beyond federal benefits: Alabama, Arkansas, Connecticut, Louisiana, Maryland, Ohio, and Rhode Island. These include state tax credits, additional capital gains exclusions, and property tax reductions. For housing-specific incentives in OZ tracts, see our down payment assistance guide.