Opportunity Zones 2.0: Overview, Benefits, and Wisconsin Process

Opportunity Zones are designated areas aimed at increasing investment by offering federal tax incentives to investors who fund projects within these census tracts. Every 10 years, each state’s governor is allowed to nominate up to 25% of their state’s low-income census tracts to be designated as OZs by the federal Department of Treasury. OZs were originally created under the Tax Cuts and Jobs Act of 2017 (known an OZ 1.0) and were then made permanent under the One Big Beautiful Bill Act (known as OZ 2.0). OZs are redesignated every decade with the newest round of OZs set to become active by Jan. 1, 2027. 

Under the TCJA, in 2017, there were 8,726 eligible census tracts designated as OZs nationwide and 120 of these are in Wisconsin. The OBBBA tightened eligible criteria for census tracts under OZ 2.0, which decreased the amount of eligible census tracts by ~6300 OZ 2.0 designations nationwide. In Wisconsin, this will be a 36% decrease, or ~77 OZ 2.0 designations. Under OZ 2.0, Wisconsin has one of the highest percentage decreases in eligible census tracts compared to other states. 

Under OZ 2.0, a census tract must be a “low-income community”, or LIC. For a census tract to qualify as a LIC, it must meet either: 

a). median family income ≤ 70% of area MFI, or 

b). poverty rate ≥ 20% and MFI ≤ 125% of area median. 

OZs are valid for a 10-year period. OZ 1.0s were designated on July 9, 2018, and are active until Dec. 31, 2028. OZ 2.0s are to be designated by Oct. or Nov. 2026 and will be active starting on January 1, 2027. OZ 2.0s will expire by Dec. 31, 2036. 

Opportunity Zones tax benefits are realized by investing into a Qualified Opportunity Fund (QOF). Investing in a QOF can reduce defer, reduce, and even eliminate federal capital gains tax liability: 

• Deferral: Investors may defer taxes on capital gains that are reinvested in a QOF for up to five years. 

• Basis Step-up (reduce): After the five-year deferral period, investors can receive a 10% reduction in their capital gains tax liability. This increases to 30% for rural-specific QOFs. 

• Tax-free growth (eliminate): Gains earned on QOF investments held for at least 10 years are permanently exempt from federal capital gains tax. 

A QOF is an investment vehicle that files either a partnership or corporate federal income tax return and is organized for the purpose of investing in OZ property. To become a QOF, an eligible corporation or partnership must self-certify annually by filing a Form 8996 with its federal income tax return. Investing in a QOFs are the only way for investors to be able to claim the federal capital gains tax advantages under the OZ program. 

You can utilize Opportunity Zone tax incentives even if you don’t live, work, or have an existing business in an OZ. You need to invest the amount of an eligible gain in a QOF and elect to defer the tax on that gain.

There is no minimum investment threshold.

Under OZ 2.0, a rural area OZ is defined as any eligible census tract that does NOT meet the following criteria: 

a). A city or town with a population greater than 50,000, AND 

b). Any urbanized area contiguous and adjacent to a city or town with a population greater than 50,000.  

The OBBBA included enhanced tax incentives for Rural Area OZ 2.0 designations. Investors into rural-specific QOFs are eligible for a higher reduction on their deferred capital gains tax liability. The standard OZ reduction of their deferred capital gains tax liability is 10%, but for rural-specific QOFs the reduction is 30%. This change seeks to better incent investment into low-income, rural census tracts.

Yes, visit the Department of Revenue for details on tax benefits.