Guidance: More Than 3,300 Opportunity Zones Qualify as ‘Rural’

The U.S. Department of the Treasury and the Internal Revenue Service lowered the barrier for investment in rural opportunity zones, effective following the passage of the One, Big, Beautiful Bill Act.

Although a number of changes to the opportunity zone program will not take effect until 2027, the reconciliation bill immediately slashed the required investment for “substantial improvement” of existing properties in rural qualified opportunity zones from 100% to just 50% of the property’s original basis.

This July 4, 2025, change, according to the IRS, is designed to accelerate investment in underserved rural areas and to address the unique challenges of rural development. To apply the lower threshold to these qualified opportunity zones, the IRS has published new guidance defining a “rural area” as any area that isn’t:

• A city or town with a population greater than 50,000 inhabitants (based on 2020 Census data); or
• An urbanized area that is “contiguous and adjacent” to a city or town with a population greater than 50,000 residents.

This definition broadly aligns with criteria used by the U.S. Department of Agriculture for its rural development programs, ensuring that the tax break is focused squarely on areas outside of large metropolitan hubs.

There are currently 8,764 QOZs in the United States, many of which have experienced a lack of investment for decades. Of those, this tax notice 2025-50 confirms 3,309 existing QOZs designated back in 2018 are comprised entirely of a rural area.

The core of the opportunity zone incentive allows investors to defer or eliminate taxes on capital gains by reinvesting them through a qualified opportunity fund into properties within designated QOZs. Under the original 2017 Tax Cuts and Jobs Act, substantial improvement meant that an investor had to increase the property’s basis by 100% within a 30-month period, meaning they had to essentially double the building’s value through improvements.

The updated 50% rule applies only to improvements of tangible property, such as buildings, used in a trade or business at the start of the 30-month period.

The Treasury and IRS noted that this notice is not related to the forthcoming round of QOZ nominations and designations authorized by the law, which will be addressed in future guidance.

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