Treasury’s Opportunity Zone Guidance Is Worth Parsing by States

The Treasury Department last month released Revenue Procedure 2026-14, which explains how states should nominate population census tracts that qualify as low-income communities to be designated as opportunity zones. States can only nominate a portion of tracts that are considered to be low-income communities, and the nomination process starts on July 1. As a result, states have been anxiously awaiting this notice while they develop their own selection process.

The opportunity zone incentive was created as part of the 2017 Tax Cuts and Jobs Act with the goal of increasing private capital investment in certain population census tracts by providing income tax benefits to such investors. The incentive had been temporary, but the tax and spending package enacted last July made it a permanent income tax benefit, with enhanced income tax benefits for investors—especially for investments made in qualified opportunity funds that deploy their funds in rural areas.

This increase in income tax benefits for investments in rural qualified opportunity funds is significant. Investors will benefit for a couple of reasons. First, there’s an income tax deferral of an eligible gain to the taxable year including the date that’s five years from the date the investment is made to the qualified opportunity fund. Second, there’s a partial exclusion of such gain at the end of the deferral period.

The amount of the exclusion is 10%, but if an investment is made into a qualified rural opportunity fund, then the amount of the exclusion is tripled to 30%. Under the new guidance, a population census tract is a low-income community where the tract either has a median family income not exceeding 70% of the areawide median family income, or a poverty rate of at least 20% combined with a median family income that doesn’t exceed 125% of the areawide median family income.

This definition of a low-income-community is more restrictive than that in the Tax Cuts and Jobs Act, where a tract was a low-income community where it had a median family income not exceeding 80% of the areawide median family income, or a poverty rate of at least 20% (with median family income limit).

The number of tracts in a state that may be designated as opportunity zones may not exceed, during any 10-year designation period, 25% of the number of low-income communities in the state, with certain exceptions for states containing fewer than 100 low-income communities. This has created a competitive nomination process in many states—particularly where a state believes the enhanced income tax benefits for investments in low-income communities in rural areas could be impactful.

In an appendix to the guidance, the Treasury Department identified 25,332 population census tracts that are low-income communities and eligible for nomination, with 8,334 of these tracts located entirely in rural areas. The ancillary documents to the guidance detail the methodology used by the Treasury Department in determining these eligible tracts. The department also will be releasing an online resource showing the exact location of every tract listed in the appendix, with demographic information such as whether the tract entirely comprises a rural area.

States can make multiple submissions during the 90-day nomination period, which starts on July 1, and they can modify previously submitted nominations during that period. The Treasury Department will have 30 days to certify a state’s nomination and designate a nominated tract as an opportunity zone.

States can request a 30-day extension for both the nomination and certification periods. Any population census tract certified and designated as an opportunity zone will commence that status on Jan. 1, 2027, and continue until Dec. 31, 2036.

The Treasury Department acknowledges there could be tracts eligible for nomination that aren’t listed in the guidance or the expected online information resource. One example is where the tract is missing information on its median family income and poverty rate.

The guidance enables states to request that these unlisted tracts be considered eligible for nomination by demonstrating that such tracts satisfy the requirements to be a low-income community. Additional guidance will likely be issued to provide states with more detail on this process.

Many sponsors are planning to create qualified rural opportunity funds because of the increased income tax benefits for their investors. This has the potential to drive a significant amount of private capital to these rural areas. States should seriously consider nominating an appropriate allocation of low-income communities located entirely in these rural areas based on the guidance. At the micro level, states need to nominate low-income communities in these rural areas that are attractive to these qualified opportunity funds.

States should also examine the current list of low-income communities to identify tracts missing from the guidance’s appendix that should be included. These tracts may be missing information on both median family income and poverty rate. Because it may be possible to nominate these tracts by demonstrating that they are in low-income communities, states should start analyzing available data.

The Treasury Department used data from the 2020-2024 American Community Survey to create the list of low-income communities set forth in the guidance. States should look at other available ACS data even where that data is derived prior to 2020 to demonstrate that a missing tract meets the current definition of a low-income community. Future guidance ideally will address other ways to prove up these missing tracts.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Marc Schultz is a partner at Snell & Wilmer whose practice is concentrated in federal, local, and state taxation matters.

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