By Scott Manning and Bruce Thompson
States will soon decide which low-income census tracts qualify as Opportunity Zones, giving developers, investors and community leaders a chance to weigh in on where those incentives could do the most good.
Since the enactment of the program in 2017, Qualified Opportunity Zones across all 50 states, the District of Columbia, and U.S. territories have attracted significant private investment, fueling housing development, job creation and economic revitalization in underserved communities.
With the current Opportunity Zone program set to sunset as of Dec. 31, 2026, recently enacted legislation expands and makes permanent Opportunity Zone tax benefits for investments made on or after Jan. 1, 2027, into newly designated Qualified Opportunity Zones.
Beginning on July 1, 2026, the governor of each state may nominate up to 25 percent of the state’s low-income communities for designation as new Qualified Opportunity Zones effective Jan. 1, 2027. Consequently, multifamily and affordable housing developers — and the investors that support them —have a short window to provide elected leaders with insight as to the low-income communities that could benefit most from Opportunity Zone designation — particularly those where additional housing supply is both needed and economically viable.
How the Opportunity Zone Program Works
The Opportunity Zone program provides investors with substantial federal income tax incentives but imposes restrictions on the timing of qualifying investments and the entity structure through which investments into the Qualified Opportunity Zones may be made.
An investor who realizes capital gain (for example, upon the sale of stock or real estate) may receive tax benefits under the program by investing cash or property up to the amount of the capital gain within 180 days of realizing that gain.
The investment must be made into a Qualified Opportunity Fund. A QOF is a corporation or partnership organized to invest in Qualified Opportunity Zone property, including multifamily and affordable housing assets, if certain conditions are satisfied.
At least 90 percent of a QOF’s assets must consist of Qualified Opportunity Zone property, making the structure particularly well suited for real estate investment strategies that deploy capital into long-term, income-producing housing developments.
Tax Benefits for Housing-Focused Investors
The tax benefits under the Opportunity Zone program as originally enacted in 2017 fall into three primary categories:
- Deferral of Capital Gains — Investors could defer recognition of capital gains until Dec. 31, 2026, or until the QOF investment is sold or exchanged, whichever occurs first.
- Basis Step-Up — An investor’s initial basis in a QOF investment increases by 10 percent if the investment was held for five years (prior to Jan. 1, 2027) and by an additional 5 percent if held for seven years, reducing the taxable portion of the original capital gain.
- Exclusion of Future Gains — Most significantly, an investor who holds a QOF investment for at least 10 years may elect for the basis in the QOF to equal the fair market value of the investment at the time it is sold or exchanged. As a result, the investor is not required to recognize gain on any further appreciation in the value of the investment.
For multifamily and affordable housing sponsors, this third benefit can offer the potential for complete avoidance of tax on future gains generated by long-term residential development projects — an outcome that aligns with typical investment horizons in workforce housing, LIHTC-adjacent developments and other community-focused real estate strategies.
Key Changes for Post-2026 Investments
As the end of the first Opportunity Zone cycle approaches, developers and investors should focus on the new framework enacted last July, which will take effect for investments beginning Jan. 1, 2027, and will operate on a recurring 10-year cycle.
Under the new framework:
- Rolling Capital Gain Deferral — Deferral of capital gains will operate on a rolling five-year basis, allowing investors to defer recognition of capital gains until the sale of the QOF investment or the fifth anniversary of the investment date, whichever happens first.
- Revised Basis Step-Up — The new framework retains the 10 percent basis step-up for QOF investments held for at least five years but eliminates the seven-year benefit.
- Enhanced Incentives for Rural Investment — Investors may receive a 30 percent basis step-up for investments in qualified rural opportunity funds. This enhancement may present opportunities for affordable housing developers pursuing projects in smaller or underserved markets where equity may be limited.
- Increased Census Tract Eligibility — The statutory definition of a low-income community has been broadened by lowering the median family income threshold from 80 to 70 percent of the area median income.
The new framework also expands opportunities in rural areas by easing the scope of improvements required to be made in qualified rural opportunity zones. A substantial portion of a QOF’s tangible personal property must either be initially used by the QOF or substantially improved by the QOF.
Under current law, substantial improvement requires capital improvements that double a property’s basis within 30 months. Under the new framework, however, this threshold is reduced to 50 percent for tangible property located in qualified rural opportunity zones.
Coming Opportunities: Advocating for New Opportunity Zone Designations
With the next cycle of Opportunity Zone designations approaching, investors, developers and community leaders have a unique chance to influence the designation of census tracts as Opportunity Zones in their state for the next 10 years. Engagement with state legislators and state commerce departments may help ensure that qualifying census tracts capable of supporting residential development are included in future designations.
Before July, those active in the multifamily industry should engage with policymakers to help align future Opportunity Zone designations with housing investment strategies that address affordability challenges while delivering long-term value for investors.
Scott Manning and Bruce Thompson are partners at Parker Poe’s Charlotte and Raleigh, N.C., offices. Manning leads the firm’s tax practice group, and Thompson leads the firm’s government and public policy group. They can be reached at [email protected] and [email protected].