Opportunity Zones 2.0 – Live From The Land Of OZ

Earlier today I had the honor and pleasure of hosting Emily Lavery from Fulcrum Public Affairs and Catherine Lyons from the Economic Innovation Group (EIG) on our quarterly webinar series "From the Land of OZ" where we focus on all things OZ related.

Super discussion from the panelists on a wide range of topics and great questions from the audience on topics of interest to them.

Timing – Treasury and HUD are working through the ACS census data that was released at the end of January 2026 and looking to issue maps of eligible areas to the Governors of all 50 states as well as the District of Columbia, Guam, Puerto Rico and the US Virgin Islands. Governors will have approximately 90 days to decide which of the eligible areas will become actual OZ 2.0 zones in their applicable state, noting that their selections will be limited, by statute, to no more than 25% of the eligible areas in a given state. These selections will occur on or around July 1, 2026. These 2.0 zones will then become the 2.0 zones for the next ten years when the process will repeat itself.

By The Numbers – given that OB3 (passed and signed in July, 2025) tightened the rules on eligibility to restrict zones to locations with 70% or less of median family income levels, it should come as no surprise that there will be less overall zones – likely being reduced by approximately 24% from OZ 1.0 to 2.0 (i.e., from 8,764 zones in 1.0 to around 6,544 zones in 2.0). Most states will have less zones – some up to 35-40% less zones (e.g., Minnesota, California, Nebraska, Oregon, etc.), while only a few states will see increases.

Rural Zones – we discussed the increased interest in "rural zones" – zones which are of population centers of less than 50,000 people (and not next to areas with over 50,000 people). The goal of OB3 is to deliver on a campaign promise to rural areas and to increase the economic development activity in these areas beyond the 38% of zones picked in the rural areas in OZ 1.0. OZ 2.0 incents development in rural zones by increasing the "deduction benefit" from 10% to 30% at the end of five (5) years of investment and further reduces the amount of substantial improvement that must be done in a real estate project from 100% to 50% – big changes.

Resources – we covered that folks should be aware that the www.EIG.org site is a super place for information as is the Novogradac site (www.novoco.com), Jimmy Atkinson's site (www.opportunityzones.com) and Jill Holman's weekly deal publications.

Bonus Depreciation – we discussed that under OB3, bonus depreciation for real estate projects is alive and well and renewed and for buildings being built there is 100% depreciation for property with a 20 year or less useful life (i.e., around 35% of the cost of a multi-family project, 50% of a hotel project, 30% of an industrial project, etc.) and that while all US projects are entitled to this benefit, ONLY projects done in an OZ will be eligible for NO DEPRECIATION RECAPTURE upon a sale of the property. As such, an OZ project, if done correctly can allocate depreciation during the term to its investors sheltering income distributions to the extent of depreciation, have no capital gains on the sale of the asset after ten years and NO depreciation recapture. Very powerful stuff friends. Yes, this does not make a bad deal good...but it makes a good deal, very very good.

Parting Reminder – please remember, being eligible is a start but if the Governor of your state does not pick your site from the list of eligible sites then your site will not be an OZ 2.0 site.

Separately, if you have OZ 1.0 property and you are looking to get your site reauthorized under OZ 2.0 if it is eligible, I would not be waiting around and hoping, rather, I would be meeting with the town mothers and fathers where your OZ site is located to make sure they are aligned with your vision of what you want to develop and see if they are willing to send the applicable Governor a letter of support in this regard. Moreover, as others will surely be raising their hands to show the Governor's office how worthy their sites are for OZ 2.0 qualification, I would also be looking to share with the Governor's office why your site is relevant and should be picked as an actual site (i.e., job creation, health impacts, neighborhood creation, ending food blight, etc.).

Owners of OZ 1.0 sites should also be thinking about obtaining a written third party appraisal of their property if they are of the view that their property has deteriorated in value. Why – the OZ rules allow one to pay the deferred capital gains tax at the end of the deferral period (i.e., 12-31-26) on the LOWER of your actual investment AND the fair market value of the property on 12-31-26. Rather than guessing at what FMV is for your property having an appraisal in place that supports your position on this point will be important if the IRS ever challenges your and your accountant's conclusion. Again, many have NOT focused on the point that the tax that is due at the end of 2026 is based on the LOWER of actual investment and FMV.

• Follow the Yellow Brick Road– there is much to do friends. I strongly suggest that you not wait around to be dictated to on where the OZ 2.0 zones will be if you are looking to develop a site – see if it is likely to be eligible, get local support letter and go see the Governor to advocate for your site before it is too late. Be proactive vs. waiting for the final OZ zones to be set in stone for the next 10 years. Separate discussion outside the bounds of today's soap box should be focused on regarding bonus deprecation and how it can be used to appropriately reduce taxable income during the 10-year holding period and how OZ's that sell after 10 years of the holding period do NOT pay depreciation recapture. Happy to discuss offline just email me.

Duane Morrishas an activeTax Credits and Opportunity Zone Teamto help organizations and individuals plan, respond to, and invest in Opportunity Zones and low-income and rural areas throughout the USA, including the US Virgin Islands and Puerto Rico using tax credit equity and standard equity. We have closed over 403 OZ deals since their inception and are actively working on over 17 OZ projects for owner/developers, investors and business owners at the moment. We would be happy to discuss your proposed project or investment with you.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.