OZ 1.0 → OZ 2.0 Transition Guidance

Key Takeaways from Novogradac & Company LLP’s Tax Credit Tuesday Podcast
Ascension OZ Advisors | OZ Alliance 2.0

The original designation of Opportunity Zones (“OZ 1.0”) remains valid through December 31, 2028.
The next round, “OZ 2.0,” becomes effective January 1, 2027, creating a two‑year overlap (2027–2028) where both rounds are in play.
The statute under the One Big Beautiful Bill Act (signed July 4, 2025) gives the OZ incentive permanence and mandates periodic re‑designation beginning 2027.
Key data release dates: the updated American Community Survey (ACS) data expected December 2025 will inform eligibility; governors begin nominations July 1, 2026.

Dual designations: Treasury should affirm that OZ 1.0 tracts remain valid through 2028 even as OZ 2.0 tracts commence in 2027.
Puerto Rico special‑rule: Clarify that Puerto Rico’s OZ status is protected through December 31, 2028, and does not cut off early in 2026.
Legacy business eligibility: Long‑cycle development projects in expiring OZ 1.0 tracts need a clear path to continue qualifying beyond 2028.
Compliance continuity: Funds and QOZBs need to know how to meet ongoing tests (tangible property, gross income, etc.) once an OZ tract technically “expires.”

Define a “qualified pre‑existing trade or business” safe harbor for projects that have documented intent and early capital commitments.
Threshold concept: project qualifies if it has invested or committed at least $250,000 OR 5% of expected development cost (whichever is less).
Clarify treatment of self‑constructed property: the current 10% ‘begun construction’ test excludes land and soft costs — that’s a problem for long entitlement timelines.
Allow qualified legacy projects to KEEP raising OZ capital after 2028 to finish construction, stabilization, or other required capital needs.

Governors start submitting nominations for new OZ 2.0 census tracts on July 1, 2026, for zones that go live January 1, 2027.
States are already building internal criteria NOW (2025) to decide which tracts they’ll nominate.
Expect roughly 20–30% fewer total OZ tracts in OZ 2.0. Competition for designation will be intense.
Rural incentive boost: OZ 2.0 includes significantly enhanced benefits for rural tracts, including a stronger basis step‑up.
Lesson learned from OZ 1.0: don’t burn a designation on parcels that can’t realistically be capitalized (e.g. protected land, no infrastructure, no path to permit).

For Funds:
You must underwrite transition risk. Disclose whether the tract is likely to be re‑designated, how construction timing lines up with 2028, and whether safe‑harbor status will apply.
For Sponsors / Developers:
Lock in documentation early: land control, working capital plans, entitlement milestones, and cost schedules. You do not want to be scrambling in late 2028.
For Investors / LPs:
Understand that OZ 2.0 changes the tax clock. Entry timing, holding period, step‑up mechanics, and exit all shift under the new statute.
For State & Local EDCs:
You are on the clock now. Build your nomination package, identify investable tracts (not just distressed tracts), and line up private capital stories you can hand your governor.