What Tax Incentives Are Available in Qualified Opportunity Zones?

 Posted on July 15, 2026 in Taxation Law

Business owners may have many opportunities for investments that can provide a good rate of return, but one issue that they will need to address is the taxes that they will be required to pay. The tax laws in the United States provide incentives for taxpayers who invest in certain areas, and updates are often made to these laws that may open up new opportunities. The One Big, Beautiful Bill Act (OBBBA), which was passed in 2025, extended and expanded the incentives for taxpayers who invest in areas known as Qualified Opportunity Zones (QOZs).

While taxpayers may benefit from making certain types of investments, they will need to make sure they follow the correct procedures when claiming tax deductions or deferrals. Failure to report information to the IRS correctly or other mistakes made during the process can lead to tax audits and penalties. Business owners should consider working with an attorney who can provide guidance on the tax laws that apply to certain investments and the incentives that may be available.

What Are Qualified Opportunity Zones?

The federal government has taken steps to encourage business owners to invest in certain areas of the country that have been overlooked. To do so, it has designated various areas as Qualified Opportunity Zones. These areas have experienced economic distress, and new investments may provide opportunities for growth, including making more jobs available and ensuring that people have access to essential goods and services. 

Under the OBBBA, State CEOs can nominate specific census tracts for QOZ designation. A QOZ must qualify as a low-income community (LIC). To be considered an LIC, a tract must meet certain criteria:

• Outside of metropolitan areas, a tract will qualify as an LIC if it has a median family income that is lower than 70% of the median family income in the state or if the poverty rate in the tract is at least 20% and the median family income in the tract is not higher than 125% of the median family income in the state.

• In metropolitan areas, a tract will qualify as an LIC if it has a median family income that is lower than 70% of the median family income in the metropolitan area or if the poverty rate in the tract is at least 20% and the median family income in the tract not higher than 125% of the median family income in the metropolitan area.

The OBBA also limits the number of QOZs in a state to 25% of the total number of LIC’s in the state. 

Incentives for Investing in QOZs

Investment vehicles known as Qualified Opportunity Funds (QOFs) may be organized as corporations or partnerships for the purpose of investing in Qualified Opportunity Zone Property (QOZP). A QOF must hold 90% of its assets in QOZP, and these assets may include stock, partnership interest, or business property.

The OBBBA allows for the temporary deferral of certain realized gains from being included in a taxpayer’s gross income if these gains are invested in a QOF. Once a taxpayer meets certain criteria, they may be able to exclude a portion of the deferred gains from their gross income. Gains that are attributable to the taxpayer’s investment in a QOF may also be excluded from a taxpayer’s gross income.

The tax benefits will depend on the amount of time an investment is held in a QOF. When a taxpayer makes an election to defer a gain, their investment basis in a QOF will be zero. If they hold their investment in a QOF for at least 5 years, their basis will increase by 10% of the deferred gain. After 7 years, their basis will increase by an additional 5% of the deferred gain. If a taxpayer holds an investment in a QOF for at least 10 years, they may be able to permanently exclude the gains received from a qualifying investment when the investment is sold or exchanged.

Contact Our San Jose Tax Lawyer

The correct forms must be filed when reporting gains and deferrals to the IRS. Annual statements of QOF investments must also be filed. The criteria for deferring gains and claiming exclusions can be complex, and mistakes made during this process could lead to penalties. At John D. Teter Law Offices, our San Jose, CA tax attorney can help taxpayers understand the requirements they will need to meet and the forms they will need to file. If any disputes with the IRS arise, we can provide legal representation, working to protect our clients’ interests and make sure they can receive benefits from their investments. Contact our office at 408-866-1810 to schedule a consultation and make sure these issues will be addressed correctly.