The Senate Finance Committee's version of the tax reconciliation bill, released on June 16, 2025 (the Bill), would make permanent the proposed incentives and requirements for Opportunity Zones and their investors. The proposed changes differ from those in the House-passed bill in several ways (see Tax Alert 2025-1068).

Current law

Opportunity Zones, which were created under the Tax Cuts and Jobs Act (TCJA), are designed to spur investment in distressed communities throughout the country by granting investors preferential tax treatment. These investments must be made through Opportunity Funds, which are specially created investment vehicles that must have at least 90% of fund assets invested in Opportunity Zones.

The preferential tax treatment offered under the Opportunity Zone program is threefold. First, investors can defer tax on capital gains invested into Opportunity Zones until no later than December 31, 2026. Second, investors that hold the Opportunity Fund investment for five or seven years as of December 31, 2026, receive a 10% or 15% reduction, respectively, on their deferred capital gains tax bill by increasing the basis of the original deferred gain. Finally, investors that hold the Opportunity Fund investment for at least 10 years can receive the added benefit of paying no tax on any realized appreciation in the Opportunity Fund investment.

Investments in Opportunity Funds may consist of partially of deferred gains and partially of basis or ordinary income, but the tax benefits under the Opportunity Zone Program accrue only on the eligible capital gains.

To date, the IRS has designated Opportunity Zones in all 50 states, the District of Columbia, American Samoa, Guam, Northern Marianas Islands, Puerto Rico and the Virgin Islands. (See Tax Alerts 2018-0806, 2018-0865, 2018-1050, 2018-1070, and 2018-1261). Those designations will expire after December 31, 2028.

Opportunity Zone designations

Senate Finance Committee proposal

The proposal would create rolling, 10-year Opportunity Zone designations beginning on January 1, 2027. This would effectively extend the program permanently.

As in the House-passed bill, the criteria for qualifying as a low-income community, and therefore an eligible census tract that may be designated as a qualified Opportunity Zone, would be narrowed so that areas with a median income of 70% or less of statewide median income (rather than 80% or less) would be eligible for designation. Similarly, low-income communities whose median income equaled or exceeded 125% of metropolitan area median family income would no longer be considered low-income communities. This would also apply to these communities that are contiguous to a qualified Opportunity Zone.

Both bills, although with slight differences, would still authorize the Secretary to designate 25% of low-income communities (under the modified definition) in each state as qualified Opportunity Zones but would require an "applicable percentage" of those designations, in consultation with the Secretary of Agriculture, to consist entirely of rural areas, For any calendar year during which a designation is made, the applicable percentage would be the greater of 33% or the percentage of the US population living within a rural area for the preceding calendar year. Tracts contiguous to rural areas would be ineligible for purposes of this designation.

Difference from the House-passed bill

The House-passed bill proposal would shorten the expiration date of current Opportunity Zone designations from December 31, 2028 to December 31, 2026, but allow additional Opportunity Zones to be designated from January 1, 2027 through December 31, 2033.

Opportunity Zone benefits

Senate Finance Committee proposal

To determine the basis increase, the proposal would include in gross income gain in the tax year that includes the earlier of the date on which the investment is sold or exchanged, or the first "decennial recognition date" occurring after the date of the investment (December 31, 2033 and each December 31 of the year that is 10 years later).

On each of the first six anniversaries of the investment, the basis would increase by the amount of the deferred gain as follows: Years 1-3 (1%), Years 4-5 (2%), Year 6 (3%). In the seventh year, investors would be required to realize their initial gains reduced by any step-up in basis.

Investments in a qualified rural fund Opportunity Fund would get a step-up in basis equal to three times that of a regular Opportunity Zone investment (discussed in the earlier paragraph). As in the House-passed bill, a qualified rural Opportunity Fund would be defined as one that holds at least 90% of its assets in an area that fulfils the proposed requirements.

For investments that are held for at least 10 years, the basis would be:

• The fair market value (FMV) on the date the investment is sold or exchanged for investments held at least 10 years but fewer than 30 years
• The FMV of the investment on the date that is 30 years from investment for investments held 30 years or more)

Differences from the House-passed bill

The House-passed bill would extend the deadline for investors to elect to invest in Opportunity Funds from December 31, 2026 to December 31, 2033, with that deadline also applying to elections to defer recognition of gains invested in Opportunity Funds. In addition, the House-passed bill would eliminate the 15% basis increase for deferred-gain investments held at least seven years but the 10% basis increase for deferred-gain investments held at least five years would still apply.

Other differences from the House-passed bill

The Senate Finance Committee proposal does not include a provision in the House-passed bill that would expand Opportunity Zone benefits and permit investors to invest no more than $10,000 of ordinary income in a qualified Opportunity Fund. For more details on this proposal, see Tax Alert 2025-1068.

Reporting requirements

The provisions in the Senate Finance Committee proposal are the same as in the House-passed bill (see Tax Alert 2025-1068).

Effective date

The changes affecting Opportunity Zone requirements and benefits would apply to investments made after the date that the legislation is enacted. The proposed reporting requirements would apply to tax years beginning after the date the legislation is enacted.

Implications

The Senate Finance Committee bill, like the House-passed bill, retains some of the key benefits of the current Opportunity Zone Program, including deferral of gains, an exclusion of gains (though the Senate version would provide a more favorable annual incremental step-up), and a step-up in basis on investments held for 10 years or more. Both the House and Senate versions would apply to new investments, and not those already held by investors under the TCJA Opportunity Zone program. Both the House and Senate versions would create new Opportunity Zone designations, add stricter low-income-community qualifications, and provide for Qualified Rural Opportunity Funds. However, important differences between the House and Senate bills still need to be reconciled, and may result in a final bill that differs from either of the two proposed versions.