New guidance from the Treasury Department and Internal Revenue Service is reshaping how investors can approach rural opportunity zone projects, easing requirements that have long been criticized as barriers to development.
The opportunity zone program, first created through the 2017 Tax Cuts and Jobs Act, was made permanent earlier this year through legislation signed on July 4. At the time, Neology Group CFO Rick Porras told GlobeSt.com that investors stood to gain a 10% step-up in basis for holding an investment at least five years, with the possibility of a 30% step-up for qualifying rural opportunity zone properties.
Now, under the updated framework, 3,309 opportunity zones drawn from the 2020 Census data are classified as entirely rural. According to the IRS, these zones consist of areas that are not cities or towns with at least 50,000 people, nor urbanized areas adjacent to them.
The impact of opportunity zones has already been visible in housing development. A CoStar analysis found that program benefits helped double the completion rate of multifamily units reserved for low-income households compared to the national average before the program existed. Approximately 68,000 more apartments were constructed in opportunity zones than in similar areas without the incentive, representing an estimated $18 billion in value based on CoStar’s average price per unit.
The new IRS guidance alters one of the most restrictive elements of the program. Previously, qualified businesses were required to “substantially” improve a property by doubling its adjusted basis after purchase. Under the updated rules, the threshold for properties in rural-designated opportunity zones has been reduced from 100% to 50%.
Carey Heyman, a CPA and managing principal for real estate at CLA, described the policy as a “major shift” and a “pivotal move to support rural development.” The lowered threshold, he explained to GlobeSt.com, addresses the reality that rural opportunity zones have often faced limited access to capital and higher infrastructure costs.
“Most notably, the notice reduces the substantial improvement threshold for properties in rural-designated OZs from 100% to 50%, offering long-awaited relief to projects that have struggled under previous requirements,” Heyman said. The change, he added, reflects a growing recognition of the hurdles facing rural communities and signals “a broader commitment to inclusive economic development.”
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