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The enactment of the in July 2025 restructured the Qualified Opportunity Zone (QOZ) program. It鈥檚 now permanent, encouraging developers and investors to learn about the benefits and implementation. QOZ should no longer be viewed as a temporary tax stimulus but rather (like the IRC 1031 exchange) as a tool to improve project feasibility and investor outcomes.

The 2025 version (QOZ 2.0) of the program includes updates. Two key changes are permanence and provision of additional benefits for rural developments. Permanence was accomplished via a rolling deferral structure. Instead of a fixed date for recognizing invested capital gains, gains invested through a QOF are deferred for five years from the investment date. At that point, the deferred gain is recognized with a 10 percent step-up in basis.

The most significant benefit from QOZ 1.0 remains: if investors hold the asset for between 10 and 30 years, there is a 100 percent step-up in basis when liquidated, eliminating tax gains during the hold period.

Anatomy of a QOZ project

QOZ projects are not fundamentally different from traditional real estate developments. They are typically structured using limited liability companies (LLCs) and investor return waterfalls, with QOZ rules operating as an overlay on existing laws.

LLC and securities laws still apply. The standard test considers whether there is an investment of money in a common enterprise with an expectation of profit derived from the efforts of others. Manager-managed LLCs are generally treated as securities, while member-managed LLCs are not.

QOZ and Qualified Opportunity Zone Business (QOZB) entities must have at least two members, preventing disregarded entities. Clear structuring and documentation are particularly important given the added risks of rural development.

Emphasis of rural development

Congress to encourage rural development. Post-COVID shifts have increased migration from metropolitan areas to rural ones, where daily life often presents fewer obstacles. However, financial viability of rural development has historically been difficult.

QOZ 2.0 adds two benefits for projects in rural areas (under 50,000 in population): a 30 percent step-up in basis when deferred gains are recognized, compared to 10 percent for projects in non-rural areas, and a reduced 鈥渟ubstantial improvement鈥� threshold of 50 percent of existing value rather than the normal 100 percent. While the second benefit can support rehabilitation, many rural projects involve original-use land, making the enhanced step-up in basis more impactful.

Rural development challenges

Rural projects remain difficult to finance and deliver. Lenders are often hesitant to fund them, requiring higher equity contributions. Limited comparable data complicates valuation, and concerns about population trends persist.

Construction challenges add to the difficulty. Fewer contractors are based in rural areas, material costs can be higher due to limited purchasing scale, and transportation expenses can also be greater. These factors make projects harder to underwrite and market.

The 30 percent step-up in basis helps offset these challenges by attracting more capital gains investors and increasing available equity.

Impacts of incentives

QOZ incentives are most effective when paired with federal, state, and local economic development tools. They can address infrastructure costs, financing gaps, and early operating expenses.

Bonus depreciation allows 100 percent of improvement costs to be depreciated in the first year for manufacturing facilities. In a non-QOZ development, this must be recaptured upon sale. In QOZ projects, the 100 percent step-up in basis eliminates recapture, increasing after-tax returns.

Additional tools include property tax abatements, development charge waivers, tax increment financing, low-interest loans, infrastructure funding, revolving loan programs, tax credits, and targeted grants. Each supports a different part of the capital stack and helps reduce project risk.

Coordinating these tools requires collaboration among developers, planners, municipalities, and state economic development agencies. While structured effectively, they can reduce up-front costs and improve returns.

Conclusion

The permanent Qualified Opportunity Zone program allows developers and property owners to combine tools to support rural development where it may not have been feasible previously. Creativity and research are the keys. Every state is different, so working with local professionals is essential to building a successful capital stack and delivering strong returns to QOZ investors.

Attorney Coni S. Rathbone is of counsel at VF Law. She works in the firm鈥檚 business and real estate practice groups. Contact her at 208-469-3773 or [email protected].

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the author and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither the author nor the 91视频 guarantees the accuracy or completeness of any information published herein.