By Barry Wides, CPA
Managing Director, Artisan Advisors 

The recently enacted 2025 Tax and Spending Bill introduced significant changes to housing and community development programs that affect banks. This article, the second in our series, examines the bill’s revisions to the Opportunity Zone (OZ) tax incentive—now called “OZ 2.0.” 

Background: Opportunity Zone 1.0 

The original OZ tax incentive, enacted in the 2017 Tax Cuts and Jobs Act, encourages investment in economically distressed areas through tax benefits for capital gains reinvestment. Here’s how it works: 

Investment Mechanism: Investors can reinvest capital gains into Qualified Opportunity Funds (QOFs), which finance newly-built or substantially improved real estate as well as other operating businesses in designated OZs. 

OZ 1.0 Tax Benefits: 

1. Tax Deferral benefit: Taxes on original capital gains invested in a QOF are deferred, with partial exclusion of those gains in some instances. 
2. Long-term gain exclusion: Gains from QOF investments held for more than 10 years (and sold before 2047) are completely tax-free. 

OZ 1.0 Timing-Based Benefits: 

• Investments made before 2020 and held through 2026: 15% basis step-up on capital gains (plus deferral of taxes due to year-end 2026). 

• Investments made in 2020-2021 and held through 2026: 10% basis step-up (plus tax deferral until year-end 2026). 

• Investments made after 2021 and held through 2026: Capital gains deferral only; taxes due at year-end 2026 with no basis step-up. 

Geographic Eligibility Under OZ 1.0 

QOFs can only invest in census tracts designated as Opportunity Zones by U.S. states, territories, or D.C., and approved by the U.S. Treasury Department. Each jurisdiction could designate up to 25% of its low-income census tracts (LICs) as OZs. 

A census tract qualifies as a LIC if it meets either criterion: 

1. Poverty rate of at least 20%, OR
2. Median family income at or below 80% of the relevant median:

• For non-metro tracts: 80% of statewide median income. 

• For metro tracts: 80% of the greater of statewide or metro area median income. 

Jurisdictions could also nominate up to 5% “contiguous tracts”—areas that don’t qualify as low-income themselves but border qualifying tracts and have median family income less than or equal to 125% of the adjacent LIC. 

In total, more than 8,700 census tracts across all 50 states, D.C., and the five U.S. territories were designated as Qualified Opportunity Zones. These OZ 1.0 designations remain in effect until December 31, 2028. 

What’s New: OZ 2.0 Changes  

Permanency: The most significant change is that the incentive is now permanent—the previous year-end 2026 sunset has been eliminated. 

Revised Basis Step-Up: 

• Non-rural QOF investments: 10% step-up after 5 years of holding. 

• Rural QOF investments: 30% step-up after 5 years of holding. 

• These step-up levels replace OZ 1.0’s 15% step-up after 7 years of holding. 

Geographic Redesignation: OZ geographies will now be redesignated every 10 years. The next designation cycle begins January 1, 2027, and runs through 2036. 

Stricter Income Thresholds: The income definition for eligible “low-income communities” has been lowered from 80% to 70% of the relevant median income (statewide or metro). 

Rural Requirements: At least 25% of census tracts designated for OZ benefits in each jurisdiction must be rural. 

Contiguous Tract Changes: Adjacent tracts can no longer qualify based solely on proximity to a qualifying OZ tract. 

Puerto Rico Changes: Previously, all low-income census tracts in Puerto Rico automatically qualified as OZs. Under OZ 2.0, Puerto Rico faces the same 25% limit on LIC designations as other jurisdictions. 

Enhanced Rural Incentives: OZ 2.0 defines rural areas as any geography excluding cities or towns (and their adjacent areas) with populations exceeding 50,000. Rural investments receive: 

• 30% basis step-up after 5 years (versus 10% for non-rural for 5 year holds). This rural advantage is particularly significant given the 10% cap on non-rural step-ups. 

• Reduced substantial improvement requirement: 50% of property basis (down from 100% for non-rural areas in OZ 1.0 and 2.0). 

Although the new OZ designations are not likely to be completed until late 2026, Novogradac has developed a mapping tool that shows OZ 1.0 eligible LICs, boundaries of non-rural areas, and Census tracts that, based on the most recent available data, are likely to be eligible/ineligible for designation as OZs during the designation period scheduled to begin on July 1, 2026.  

Expanded Reporting Requirements 

QOFs must now provide substantially more information in annual returns beyond the standard property value reporting, including: 

• Approximate number of residential units held. 

• Approximate number of full-time equivalent employees in the QOF and its portfolio entities. 

• Other employment impact indicators as determined by the Treasury Department. 

Bank Strategies for OZ 2.0 Investment 

Several banks have pioneered QOF investment approaches since the incentive was authorized in 2017: 

PNC Bank: In summer 2018, PNC closed on a $486 million fund providing capital for OZ projects through equity investments and loans. PNC’s strategy focused on: 

• Identifying projects in its existing real estate development pipeline located in OZ geographies. 

• Ensuring consistency with CRA community development criteria. 

• Targeting projects that were: 

• Fairly advanced in planning and development and near closing. 

• Located in the bank’s retail footprint. 

• Valued at $5-20 million in total development costs. 

Examples of PNC’s QOF investments are provided in a January 2021 OCC OZ publication. 

KeyBank: In late 2018, KeyBank closed a $50 million bank-sponsored QOF. By June 2019, the fund had invested in four affordable housing projects across Colorado, Ohio, Connecticut, and Massachusetts. The bank used capital gains from selling a business unit to fund these investments. 

Woodforest National Bank: Woodforest took a collaborative approach, partnering to create two funds: 

1. Woodforest CEI-Boulos Opportunity Fund: A $26 million fund managed by CEI-Boulos Capital Management, LLC (a joint venture between Coastal Enterprises, Inc., a CDFI, and The Boulos Company, a commercial real estate firm). The fund targets high-impact real estate projects in LMI communities within OZs across Woodforest’s 17-state footprint. 
2. Allivate Impact Capital (AIC) CEI-Boulos Opportunity Fund: Seeded with $25 million from Woodforest, this fund raised $50 million from third-party investors to finance high-impact commercial real estate projects in OZs, focusing on: 

• Job creation 

• Affordable and workforce housing 

• Environmentally sustainable developments 

• Main Street revitalization or historic preservation 

• Developments serving nonprofit organizations 

 

Fifth Third Bank:  Fifth Third partnered with third-party QOF sponsors for projects in its footprint across three categories: 

1. Affordable housing
2. Workforce housing and other multifamily community priorities
3. Non-residential or mixed-use real estate serving community needs, plusprojects supporting local job and business growth

Projects had to meet these social impact criteria: 

• Located in a qualified Opportunity Zone. 

• Eligible as a public welfare investment. 

• Located in an MSA where Fifth Third identified community need under CRA. 

Fifth Third committed $100 million to invest in QOFs sponsored by the Local Initiatives Support Corporation’s National Equity Fund and 3 other sponsors. 

Additional Resources: More examples of national bank OZ investments are available on the OCC’s public welfare investments “At-a-Glance” charts . 

Legal Authority for Banks to Invest in QOFs 

QOF investments involve reinvesting capital gains proceeds as equity in corporations or partnerships that typically invest in rental real estate and other operating businesses. Banks must therefore identify their legal authority for making such equity investments. 

National Banks: National banks typically rely on the public welfare investment (PWI) authority under 12 USC 24(Eleventh) and 12 CFR 24. Key requirements: 

• The QOF must primarily benefit LMI individuals, LMI areas, or other areas targeted by government entities for redevelopment (note: a state’s designation of a census tract as a qualified OZ LIC does not automatically establish it as a government-targeted redevelopment area under PWI authority). 

• A QOF investment can also qualify as a PWI if it meets the “qualified investment” definition under 12 CFR 25.23 of the CRA regulations. 

The OCC encourages national banks to file for PWI prior approval for QOF equity investments (see www.occ.gov/pwi ). Artisan Advisors can assist institutions with PWI prior approval requests, which OCC typically processs within 30 days of when complete information is initially provided. 

State Member Banks: Similar authority to national banks exists under 12 USC 338a and 12 CFR 208.22. Additionally, state member banks can often make investments under a reciprocity provision (12 CFR 208.22(b)(1)(ii)) if the OCC has issued a prior approval letter for a PWI to a national bank. 

State Non-Member Banks: May rely on Section 24 of the Federal Deposit Insurance Act, which generally permits state banks to make the same investments and engage in the same activities as national banks. Since public welfare investments are permissible for national banks, state banks can make public welfare investments if allowed by their governing state law (see pages 29-30 of the FDIC’s “Strategies for Community Banks to Develop Partnerships with Community Development Financial Institutions” ). 

Federal Savings Associations: Have three legal authorities for investing in QOFs, as outlined on page 5 of the OCC’s Opportunity Zones Fact Sheet. 

Community Reinvestment Act (CRA) Credit Eligibility 

When QOF Investments Qualify for CRA: QOF investments may be eligible for CRA credit if they meet the definition of community development, which includes: 

• Affordable housing (including multifamily rental housing) for LMI individuals. 

• Community services targeted to LMI individuals. 

• Activities promoting economic development by financing small businesses and small farms. 

Economic development activities qualify when they support permanent job creation, retention, or improvement for LMI individuals, in LMI geographies (less than 80% AMI), or in areas targeted for redevelopment by federal, state, local, or tribal governments. 

Community development also encompasses activities that revitalize or stabilize: 

• LMI geographies (less than 80% AMI) 

• Designated disaster areas 

• Distressed or underserved non-metropolitan middle-income geographies 

Important Limitations: Not all QOFs qualify for CRA credit for two key reasons: 

1. 1. Purpose mismatch:Not all QOFs serve a community development purpose as defined in CRA as outlined above. 
2. Geographicqualification differences: The OZ definition of low-income community (LIC) differs from an LMI geography under CRA. Specifically, OZ LICs can include census tracts at or above 80% of median income as long as they have a poverty rate of at least 20%. The CRA/OZ income limit mis-match can occur in census tracts with poverty households representing 20% or more of the population but where there are higher-income households in the tract, as well. This could result in an overall tract median family income above the CRA LMI threshold of 80% of AMI. 

Seeking Guidance: National banks and federal savings associations can seek OCC guidance on CRA eligibility for prospective OZ investments through the agency’s Qualifying Activity Confirmation Request (QACR) process. Artisan Advisors can assist institutions with these QACR filings. 

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About the author: Mr. Wides is a leader in Artisan Advisors’ risk management practice.  Mr. Wides previously served as Deputy Comptroller for Community Affairs in OCC’s Bank Supervision Policy Department and was responsible for administration of the public welfare investment authority for national banks and federal savings associations. He can be reached at [email protected] .