From Policy to Practice: Opportunity Zones 2.0 Reforms and a State Blueprint for Impact

Introduction

Established in the Tax Cuts and Jobs Act of 2017 (Public Law No. 115-97, 2017), the Opportunity Zones (OZs) program is designed to spur economic development, job creation, and boost quality housing affordability in economically distressed communities through tax incentives that encourage long-term private investment. This unique program allows investors to defer and reduce taxes on capital gains by reinvesting those gains in designated OZs through an investment vehicle called a Qualified Opportunity Fund (QOF). It allowed the governor of each state or territory to designate 25% of the state’s economically distressed communities (census tracts) as OZs (or a total of 25 census tracts if the state had fewer than 100 low-income communities).

As of 2022, nearly 8,800 census tracts have seen over $85 billion in equity investment (JCT, 2024). OZs led to roughly a 3% to 4.5% increase in employment growth and directly caused over 300,000 residential units of construction (EIG, 2024). Investments have been directed toward a variety of projects, including housing, commercial real estate, manufacturing businesses, and start-ups. All of these projects have contributed to economic revitalization in some of the nation’s most underserved communities (JCT, 2024).

The original OZs created in the TCJA (OZ 1.0) expire with the last investable period timed for investors who realize capital gains by tax year 2026. Once OZ 1.0 expires, these communities will no longer be eligible for OZ investment. Yet, the Working Families Tax Cut (Public Law No. 119-21, 2025) expanded and made OZs (OZ 2.0) a permanent part of the tax code, which will involve a new round of low-income census tract designation of zones and take effect on January 1, 2027.

Accordingly, this issue brief provides a high-level overview of the new provisions of OZ 2.0, outlines best practice recommendations for state leaders to consider in designating a new round of OZs, and explores options for expanding it at the state level. The goal is to inform elected officials, public sector and private sector leaders, and communication strategists about potential policy options and their implications for maximizing the impact of OZs.

Opportunity Zones 2.0 in the Working Family Tax Cut

Following the success of OZs in the TCJA, Congress and the President expanded and made permanent OZs in the Working Families Tax Cut. The main policy changes in OZ 2.0 compared to OZ 1.0 are: (1) permanency, (2) new Opportunity Zone designations, and (3) enhanced benefits, especially for rural communities.

Change #1: Permanency

The Working Families Tax Cut made OZs a permanent component of the tax code, which requires an entirely new designation process and criteria. All state governors will consider census tracts that meet the new OZ 2.0 definition of low-income, then designate those census tracts as the new OZs by July 1, 2026. The new OZs take effect on January 1, 2027, at which point, investors may make an investment into the new OZs up and until these new zones expire ten years later.

The permanence of the OZ program requires a process by which governors designate new OZs every ten years. By way of example, the initial OZ 2.0 designation occurs by July 1, 2026, with the new OZs in effect on January 1, 2027. The next round of OZs would be designated by July 1, 2036, taking effect on January 1, 2037, and so on. As the new OZs open, the old OZs will close for new investment and ultimately will require a sale or a marking of the basis to fair market value 30 years after the initial date of the investment. That means that the investor’s gain is reset to zero at that point, so they lock in their tax savings, and if they keep holding, they’d only owe tax on any new gains above this higher basis. As a result, investors could earn between 30% and 50% higher internal rate of return after tax with an OZ 1.0 investment compared to a non-OZ investment. This has translated to new medical facilities, new businesses opening, and new homes being built in these low-income communities, just to name a few.

Importantly, OZ 2.0 includes enhanced reporting requirements for OZ funds and OZ businesses, modeled after the previously introduced 2023 bill, Opportunity Zones Transparency, Extension, and Improvement Act (OZTEIA, 2023). The information collected focuses on the types and amounts of investments, their locations, and the number of jobs created, among other factors. The data will inform policymakers about the outcome of the latest round of OZs in effect, which can help governors with their next round of OZ designations occurring every ten years. The policy is structured: governors designate OZs, investment opens and flows to the designated OZs, then the OZ funds report about the funds and projects, which in turn provides data to the governors for their next OZ designation process.

Change #2: New Criteria for Opportunity Zone Designations

In the Working Families Tax Cut, the governor of each state or territory may designate 25% of the state’s economically distressed communities (census tracts) as OZs (or a total of 25 census tracts if the state had fewer than 100 low-income communities) as Opportunity Zones. The Working Families Tax Cut adopted a stricter definition of poverty to home in on census tracts with lower area median income—decreasing from 80% median family income for OZ 1.0 to 70% median family income for OZ 2.0. Specifically, to be considered low income, the population in census tracts not located in a metropolitan area must have a median family income that is less than 70% of the statewide median family income (Public Law No. 119-21, 2025). For census tracts in metropolitan areas, the population’s median family income may not exceed 70% of the metropolitan area median family income (Public Law No. 119-21, 2025). Alternatively, the census tracts can be eligible if they have both (a) a poverty rate of at least 20%, and (b) a median family income that does not exceed 125% of statewide (if not in a metropolitan area) or the metropolitan median family income (if located in a metropolitan area) (Public Law No. 119-21, 2025). (There are no longer “contiguous census tracts” such as in the OZs 1.0.)

Importantly, OZ 2.0 created new enhanced benefits (discussed in the next section) for Opportunity Zones in rural areas, called Rural Opportunity Zones (Rural OZs). The Rural OZs are low-income census tracts located in a rural area defined as an area not in a city or town with a population of more than 50,000 people and not adjacent to a city or town with a population of more than 50,000 people. (For example, this rural OZ criteria eliminates suburbs.) By increasing the incentives in rural communities, policymakers intend to attract more investment to these rural OZs. In OZ 1.0, rural OZs received disproportionately less investment compared to non-rural communities; rural OZs received about 9% of the investment, although comprising about 24% of the zone designations (JCX-36-24, 2024; GAO, 2021).

On September 30, 2025, the U.S. Department of the Treasury issued guidance for investments in rural Opportunity Zones under the Working Families Tax Cut (Treasury, 2025). The guidance showed the locations of the rural areas that apply to the current Opportunity Zones under the TCJA. In addition, the Treasury’s guidance outlined the one provision that became effective at the enactment of the Working Families Tax Cut, which was the reduction in substantial improvement (as more fully described below).

For example, a project in a newly designated rural Opportunity Zone would need substantial improvements invested of 50% of the improvement value, rather than 100%. So, a property in a rural OZ valued at $1,000,000, of which land is $600,000 and improvements are $400,000, would require an additional $200,000 (50% in a rural OZ) at least, rather than $400,000 (100% in a non-rural OZ). Reducing the capital in current rural OZs should help attract more capital to these OZs.

Change #3: Enhanced Benefits

At first glance, OZ 2.0 benefits are similar to OZ 1.0 benefits, but a closer look reveals that these benefits are even more significant. Effective on January 1, 2027, for investments using OZ 2.0, the benefits are:  

1. Five-Year Deferral. A new five-year deferral of the original capital gain tax beginning on the date the investment is made into the qualified opportunity fund, 
2. Step Up in Basis. A new 10% step up in basis for non-rural OZ projects, which triples for investment in rural OZ projects, which is a 30% step up in basis for rural OZ projects. (This results in a 10% and 30% reduction in capital gain taxes, respectively, at the time the deferred capital gain taxes are due.) By way of example, if an investor has a $1,000,000 taxable gain, a 10% step-up cuts the taxable gain from $1,000,000 to $900,000, and a 30% step-up cuts it to $700,000 — meaning rural projects offer three times the tax benefit at that point in time.
3. Tax-Free Appreciation. Tax-free appreciation (no capital gain tax) when qualified opportunity zone property is sold after a 10-year hold, up to a 30-year hold. After a 30-year hold, the property’s basis is marked to fair market value as of a 30-year hold.

In addition to the benefits, OZ 2.0 enables investors in rural Opportunity Zones to reduce the amount of investment needed to qualify under the “substantial improvement” provision—meaning they had to invest at least as much as the cost of the improvements as they originally paid for the building itself (excluding the land). Under the new OZ 2.0 provisions, the substantial improvement requirement for rural OZs is reduced from 100% to 50% of the original investment basis, compared to non-rural OZs.

Finally, OZ 2.0 includes additional reporting requirements for funds and OZ businesses. Since these requirements were modeled on the previously introduced bill, the Opportunity Zones Transparency, Extension, and Improvement Act, additional reporting requirements are not considered overly onerous, which would prevent investment in OZs. By way of example, the types of information needed from funds include the amount of investment in OZ businesses, type of business (North American Industry Classification System), location of investments, number of residential units, if applicable, and number of full-time workers in the business.

State Implementation Strategies for the OZ 2.0 Provisions

Under OZ 2.0, all governors must designate a new slate of Opportunity Zones based on the revised eligibility criteria by July 1, 2026. Once these new OZs are designated, they are set and cannot be changed for ten years. Thus, governors have a tremendous opportunity and obligation with the OZ 2.0 designation process.

Learning from the OZ 1.0 Process

State governors previously determined the designation process for selecting which low-income census tracts become OZs. The flexibility created by giving this authority to each state (rather than centralized designation by the federal government) allowed policymakers to adjust their process to align with the specific needs of state and local communities. For example, the tract selection process of Arizona involved the Arizona Commerce Authority meeting with the city, county, and tribal governments to select tracts, and the Kansas Department of Commerce required communities to submit letters of interest about their need and investment capabilities (The White House, 2020).

Based on a survey of governors’ offices and discussions with state organizations following the OZ 1.0 designation, key elements states incorporated into their zone selection process included:

• Public transparency and feedback mechanisms: State policymakers’ approaches have varied and include creating websites that outline the process and responsible parties, as well as soliciting feedback through those websites.
• Consultation with local governments and stakeholders: State administrations engaged with mayors, elected officials, and county economic development offices to solicit their specific census tract recommendations. The local engagement helped fulfill many states’ requirements that the Opportunity Zones be dispersed evenly throughout the state, whether proportionally a minimum of one per county, or some combination. Many governors' offices worked across their administration to engage with other agencies to determine which low-income communities are most appropriate to designate.
• Custom maps and data: Many state administrations created custom maps and databases that illustrated the eligible low-income census tracts, proximity to other assets such as universities, public transportation, current and planned roads, and corresponding data such as poverty level.
• External advisory panels: State policymakers sought advice outside of the state to inform the OZ designation process, including external national Opportunity Zone experts, other state policymakers, and experts in the federal government.

The results of the OZs 1.0 zone selection were strongly positive, as evidenced by the success of OZ 1.0 and surveys of local government officials. OZs attracted well over $85 billion of equity investment into low-income communities, as of the last government report in 2022 (CEA, 2020). In addition to positive job growth, home values in OZs increased by 3.4% with no observable increase in rent (Wheeler, 2022).

Beyond OZs achieving their policy intent, local government leaders’ reactions were widely positive about OZ 1.0 zone selection and where the investment was directed, as evidenced by a national survey of mayors. Overall, the governors’ selection of OZ 1.0 effectively targeted areas of genuine economic need at the state level, and locally, mayors supported the specific designations that affected their cities. Moreover, over 65% of mayors shared that their governors adopted their selection of designated zones they requested or a very similar list. Regardless of party affiliation and city size, mayors were “happy” with the OZs designated in their cities, and, in fact, Democratic mayors were slightly happier than Republican mayors (79% vs. 65%). Finally, the mayors agreed that the governors’ selection process prioritized a desire to distribute OZs geographically and incorporated the mayor’s own input, as evidenced by the data (Menino, 2019).

OZ 2.0 Designation Recommendations

Building on the lessons of OZ 1.0, including its successes and investment challenges, state governors should ensure the OZ 2.0 designation process emphasizes data transparency, broad engagement of a wide range of stakeholders, and prioritization of reform-ready communities. As the designation process is underway, governors should ensure their state tax law conforms with the federal OZ provisions and employ strategies to attract OZ equity to the states’ OZs.

Recommendation #1: Communicate Clear, Data-Based OZ Selection Process

• Governors should create and publish state maps of eligible census tracts that highlight key assets such as universities and Historically Black Colleges and Universities (HBCUs), display underlying data like poverty rates, and include additional layers identifying eligible rural Opportunity Zones.
• Governors should publicize broadly how entrepreneurs, developers, investors, and residents can participate in the process and communicate about their interest in selecting their communities as OZs, such as in a 30-day comment period with published responses.
• Governors should establish an “OZ office” for the designation process and after it, in order to attract OZ capital to their state.
• Governors should develop and release the timeline and scoring rubric with the methodology for how census tracts are evaluated.
• Governors should communicate regularly on the status of the OZ designation process.
• Governors should publish provisional maps and share why a tract was designated.
• Following the OZ designations, governors’ OZ offices should continue to update the OZ website showing OZ projects and outcomes (e.g., units built) to share the impact of OZs and prepare for the next round of designation to occur ten years later.
• Governors should complete an after-action report about the process, since the OZ designation will occur every ten years.

Recommendation #2: Engage Broadly

• Governors should convene elected officials—congressional delegations, state legislative leaders, county executives, mayors, and tribal government leaders—to discuss the process of OZ designation and methodology for soliciting and receiving recommendations.
• Governors and elected officials should engage stakeholders—such as universities (especially HBCUs), workforce boards, economic development directors, major employers, hospitals, and utility companies—to gather input on OZ designations, identify investable projects, and understand regional population growth trends.
• Before, during, and after OZ designation, governors should meet with, solicit input from, and communicate with investors, specifically, the states’ family offices, registered investment advisors, and introduce the states’ major investors to the OZ office staff.
• Local elected officials should work with their land use planners to consider zoning, master plan, and comprehensive plan factors when developing their recommendations for zone designations.
• Governors should meet with industry experts to learn best practices and connect with governors in other states to discuss their processes.
• Governors should meet regularly with entrepreneurs and developers who own OZ businesses and ensure that they are connected with the state’s OZ office for support with project promotion and investor introductions.

Recommendation #3: Prioritize Reform-Ready Places

• Governors should prioritize eligible communities that have undertaken deregulatory reforms to remove barriers to starting businesses, hiring, and building projects, such as passing zoning reform, reducing fees for starting businesses, and committing to permit timelines.
• Governors should ask stakeholders to submit information about the reasons for nominating a particular eligible low-income census tract for designation.
• Governors should offer technical assistance to under-resourced communities, such as rural towns, during the process and following OZ designation.
• Governors should identify priorities from geographic to industry areas for investment at the local and state levels.
  • At the state level, sites or even “mega-sites” are targeted for business expansion and investment.
  • At the local level, locations or corridors targeted for investment.
• Governors should avoid designating census tracts that cannot accommodate investment, such as those entirely in military bases or residential neighborhoods.
• Governors should prioritize rural communities that were provided additional benefits as rural OZs.
• Governors should prioritize disaster-affected areas and critical-industry corridors (ports, shipbuilding, semis, critical minerals).

Recommendation #4: Pass Conformity, Amplify OZ Investment, Promote OZ Groups and Case Studies

States can amplify the effectiveness of Opportunity Zones by undertaking several reforms, starting with ensuring that the state tax code conforms with the new Opportunity Zones provisions in the federal code. Next, states should consider amplifying OZ investment by adding an OZ criterion to current state place-based tax or economic development incentives or passing OZ-aligned tax programs to add even more benefits to the program. Lastly, state and city leaders should identify OZ personnel or create an OZ organization to promote the state’s OZs and share technical expertise and case studies.

• Pass Fully State Conformity for OZs

Following OZ 1.0, most states’ legislatures and governors passed laws to align their state capital gain tax with the federal OZ program to avoid penalizing investors with a state capital gain tax when utilizing the federal OZ program. Further, states with conformity may need a legislative update for the new provisions of OZ 2.0. For those states without conformity (such as Massachusetts, California, Washington, North Carolina, and Mississippi) and those states with partial conformity, their leaders should conform to their state capital gain tax with the federal OZ provisions.

• Amplify OZ Investment by Layering in OZ to Place-Based Incentives

State legislatures and governors should prioritize OZ 2.0 locations for state-based tax credits, deductions, or exemptions. Several states have additional state-level tax incentives tied to the OZ program to further amplify tax benefits for investing in their state’s OZs. For example, Ohio implemented a non-refundable tax credit equal to 10% of the amount of equity funds invested in Ohio Opportunity Zones, subject to program restrictions. Generally, investors may apply the tax credit to Ohio income taxes, carry unused credits forward, or sell all or part of the tax credit (Ohio Rev. Code § 122.84, 2025). This could lead to more substantial and diverse investments in local communities, promoting economic growth and job creation.

• Promote OZs and Share Case Studies

State and city leaders who created organizations or dedicated staff to OZs attracted significant news and investment activity. These dedicated staff and organizations built key relationships with fund managers to educate the community and project sponsors. For example, created in 2018 as a non-profit, Opportunity Alabama (OPAL) focuses on catalyzing investment in OZ projects in Alabama. OPAL has received media attention and attracted investors who may not have otherwise considered Alabama (Hawkins et al., 2025b).

As organizations build OZ capacity and industry relationships, state and city leaders learn case studies in the market, which they can share broadly. As more project sponsors and investors learn how deals are executed with the OZ tax incentive, they learn how it can work for their own projects. Moreover, as more community leaders learn how OZs can bring jobs and infrastructure to their communities, they can best attract their desired investments.

Conclusion

President Trump has described Opportunity Zones as “the most successful economic development tool ever” (Hawkins et al., 2025a). The successes are evident in the numbers: $85 billion on new equity investment as of just 2022, causing over 300,000 units of residential development with 3.5%-4% job creation in OZs outpacing non-OZs (Hawkins et al., 2025a). With the new Opportunity Zones law in the Working Families Tax Cut, state, city, economic development, industry, and community leaders can begin now to implement best practices for their businesses and communities. The permanency of OZs underscores the need to adopt a data-driven, transparent process and focus on ensuring the communities benefit from the federal tax program.