OZ 2.0 Is Coming: Are You Ready?
If you've got a project in mind, alert state officials now in order to influence census tract mapping.
Next week, states will begin selecting census tracts for the reauthorized Opportunity Zone program. “OZ 2.0” promises even more significant outcomes than OZ 1.0, which injected $100 billion of private capital investment into distressed areas through a market-driven, flexible incentive structure.
More than 416,000 new residential addresses were created between 2019 and Q1 2025, according to data sourced from the U.S. Postal Service by the Economic Innovation Group.
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Changes that make a difference
Why is OZ 2.0 supposed to be so much better? It improves tax benefits, expands incentives in rural zones, limits census tracts to those zones that need economic investment the most and makes the program permanent, noted tax attorney Laura Cable, a partner at the law firm of Cox, Castle & Nicholson.
Further, OZ 2.0 is a rolling tax-deferral program, which means that the five-year tax deferral period begins on the day of investment and continues for five years, according to Arron Grisz, CPA, partner at Weaver| Assurance, Tax & Advisory Firm, explained.
Under the original OZ tax law, there was a fixed national deadline of Dec. 31, 2026, for paying deferred taxes on the original gain no matter when you invested. The short deferral period limited investment activity after 2021, experts say.
“Now that the program is permanent, with a deferral period running five years from the date of investment, it gives investors much more flexibility in timing,” said Elizabeth Hale, founder & CEO of eeCPA.
How stakeholders can have a say in OZ designations
State governors will nominate one-quarter of their state’s low-income census tracts beginning on July 1, 2026, with investment set to begin after OZ 1.0 expires on Jan. 1, 2027.
While there is no formal opportunity for investors or other stakeholders to have a say in which tracts are selected for OZ status, they can provide input for OZ zone designations by contacting their state assembly members or governor. Grisz noted that investors who propose projects that could make a signigicant impact on a community’s economic or housing development will have the greatest influence on new map decisions.
State Opportunity Zone coordinators, like the Arizona Commerce Authority in Arizona, are active in directing engagement from developers and investors throughout the mapping process. “That’s where stakeholders can show up and make their case,” she said, noting that the governors must submit final nominations to the U.S. Treasury by Sept. 28, 2026. “That’s a narrow window. If you have a project or a community you believe should be designated, now is the time to engage.”
Hale noted that going forward, census maps will be updated every 10 years.
The OZ mapping process
To qualify for an OZ designation, the census tract must have an income level that is 70 percent of the surrounding tracts’ median family income, with income not exceeding 125 percent of the state median income level, which varies by state. In Texas, for example, it’s $78,476; in Pennsylvania it’s $77,971; in Michigan it’s $72,389; in Louisiana it’s $60,756; in New York it’s $85,974 and in California it’s $100,100.
Previously, the tract needed to demonstrate income of 80 percent of surrounding tracts and just 20 percent of residents below poverty level. So, the census tract could include wealthy residents, too, noted attorney Daryl Jacobs, a partner at Ginsberg Jacobs law firm. This tighter income restriction means the number of OZs will be cut by more than 2,000 tracts. As such, there were 8,764 census tracts under OZ 1.0, and the projected number of tracts under OZ 2.0 is 6,544.
The zone designation process, however, gives governors a rare opportunity to shape the landscape of investment in their states and channel that investment towards the low-income communities that need it most, Jacobs noted.
Why invest in OZs
The main benefit of investing in an OZ is it allows investors to take capital gains that they otherwise would have to pay tax on and roll that amount over into an OZ, deferring recognition of that gain for five years from the day you invest, explained Cable. After five years, 10 percent of any gains from the investment is not taxed.
“You don’t have a sort of ticking clock like in the first program, so I think you’ll see a lot more people who sell assets at different times and have capital gains at different times interested in looking for OZ investments five, six, seven years down the road because they’ll still get that five-year gain deferral.”
The change that people are really excited about is the qualified rural opportunity zones, where OZ 2.0 is expected to have an even greater impact on housing and economic development. There are two bonus incentives for investing in rural OZ tracts. While the tax deferral step-up is 10 percent in urban OZs, rural tract investment provides a 30 percent basis step-up after five years.
“You get an enhanced basis step-up,” Jacobs explained. “So if you hold your asset for five years, that 30 percent basis step-up means you avoid 30 percent of the gain at the five-year deferral period.” And, he noted, if the investor holds the property for at least 10 years, 100 percent of its gain disappears.
Additionally, investing in rural OZs reduces the substantial improvement threshold for properties from 100 percent to 50 percent. “This gets people to invest in areas they otherwise wouldn’t invest in, because the tax benefits are just significantly better,” suggested Cable.
“That’s a significant difference when you’re underwriting a deal,” noted Hale. “Whether that translates to more housing development depends on deal fundamentals, but the structure is there to make rural investment more attractive than it has ever been.”
Lowering the capital investment threshold is significant. For example, if the investor paid a million dollars for a property in an urban tract and allocates $100,000 to the land, that means the depreciable basis, or amount the investor is required to invest in the property is $900,000, noted Jacobs. For rural census tracts, it’s only 50 percent, meaning you would only have to put $450,000 into it.
Additional capital resources for OZ investors
Investors can access funding for multifamily housing development. This includes low-income housing tax credits for creating affordable housing, which are typically paired with tax-exempt bonds. In addition, he said that New Markets Tax Credits can be used to create mid-market and affordable for-sale housing, because for-sale housing is considered a business.
“Investors would be smart to look at how OZ 2.0 stacks with other available tax benefits,” said Hale, noting that the Inflation Reduction Act created bonus tax credits for clean energy projects in communities historically dependent on fossil fuels. “In the right deal, an investor could combine a five-year capital gains deferral with up to 40 percent in investment tax credits. That’s a powerful combination.”
She also suggested that housing developers consider LIHTCs since they provide 9 percent for new construction and substantial rehabs and 4 percent for rehabilitation projects. “Both are claimable each year over 10 years as a percentage of the depreciable basis of the investment,” Hale suggested. “The key is working with advisors who understand how those programs interact, because the stacking opportunity is real.”
A couple more things to know
There are two additional things investors should know going into this census period, continued Hale. First, verify that your state conforms to federal Opportunity Zone treatment. Arizona does conform, but not every state does, and that distinction matters for your tax planning.
Second, if a current OZ 1.0 tract gets re-designated under OZ 2.0, the existing investment will be grandfathered in, but new capital flowing into that project after re-designation may not be eligible for Opportunity Zone tax treatment.
“That’s a detail investors and their advisors need to get right before committing capital,” she said. “And if you want to weigh in on the designation process as an investor, the most effective approach is a formal letter or mini-prospectus that clearly outlines the proposed project, its scope, and its community impact.”
Caution suggested for OZ investors
Grisz noted that a lot of clients who felt they needed to do an OZ deal in 1.0 ended up with unsuccessful projects for a variety of reasons. In one example, a value-add multifamily investor tried to do a development deal, and it didn’t go well because ground-up development was not part of their core strategy.
“Opportunity Zones can make a good deal a great deal,” Grisz warned, “but, if you’ve got a bad project in an Opportunity Zone, you still have a bad project.”
