Arizona Opportunity Zones
ARIZONA OPPORTUNITY ZONES
Opportunity Zones are economically distressed, lower-income census tracts that have received an Opportunity Zone designation by the U.S. Department of Treasury, after having been nominated by governors across the country. The Opportunity Zone designation is meant to spur investment in these areas, as those who invest in Opportunity Zones receive tax breaks.
Opportunity Zones were created as a one-time initiative in the 2017 Tax Cuts and Jobs Act to incentivize investment in underserved areas. The resulting first generation of Opportunity Zones (now called OZ 1.0) were designated in 2018, and those areas retain Opportunity Zone designation through 2028.
In 2025, Congress passed the One Big Beautiful Bill Act (OBBA) that made the Opportunity Zone incentives a permanent part of the Internal Revenue Code, with new zones to be designated every 10 years. A second generation of Opportunity Zones (called OZ 2.0) will be nominated by governors in mid-2026, and after Treasury certifies the nominated tracts, OZ 2.0 designations are slated to take effect on January 1, 2027. This means there will be a two-year overlap in the lifespans of tract designations of the first and second generations of Opportunity Zones.
As with the first generation of Opportunity Zones, governors may nominate up to one quarter of the eligible tracts in their states for second-generation Opportunity Zones designation. However, the economic criteria for eligibility are more tightly restricted for OZ 2.0, meaning fewer tracts will be eligible for second-generation Opportunity Zone status.
The OBBA also sought to promote rural development by creating a new designation for rural Opportunity Zone tracts and increases one of the three income tax benefits for investors in those tracts, while also lowering the minimum investment required to improve rural properties with structures on them.
| First Generation Opportunity Zones (OZ 1.0) | Second Generation Opportunity Zones (OZ 2.0) | |
|---|---|---|
| TRACTS | ||
| Effective dates | Mid-2018 to Dec. 31, 2028 | Jan. 1, 2027, to Dec. 31, 2038 |
| Number in AZ | One-fourth of eligible tracts: 168 | Estimeated at 121. The number could change, based Treasury guidance. |
| Qualification criteria |
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| Contiguous tracts | Allowed up to 5% of the state's OZs to not meet the economic criteria above, if each such tract were:
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OZ 2.0 and future OZ designations will not allow for contiguous tracts. |
| BENEFITS TO INVESTORS | ||
| General benefits to investors | DEFERRAL, EXCLUSIONS ON DEFERRED GAIN: Investors who had an eligible gain and invested in a timely manner (generally, within 180 days of gain realization) in a Qualified Opportunity Fund (QOF) by Dec. 31, 2019, could defer being subject to income taxes on the eligible gain until Dec. 31, 2026 (taxes due in 2027) and receive a 15% exclusion from income tax on the deferred eligible gain (in the form of a basis step up). Those who invested in 2020 and 2021 could receive a 10% exclusion. Those who invested in 2022 and beyond got only the deferral. 10-YEAR EXCLUSION: Investors who hold their investments in the QOF for at least 10 years or more get a full exclusion from income when the assets are sold (except for inventory), so long as the asset is sold no later than Dec. 31, 2047. |
DEFERRAL, EXCLUSIONS ON DEFERRED GAIN: Investors who had an eligible gain and invest in a timely manner (generally, within 180 days of gain realization) in a QOF on or after Jan. 1, 2027, will be able to defer that eligible gain to the taxable year that is five years from the date of the investment in the QOF and receive a 10% exclusion (in the form of a step-up in basis). 10-YEAR EXCLUSION: Same benefit, mostly. There is no longer a deadline by which assets much be sold, but after holding an interest in the QOF for 30 years, the basis of the assets is stepped up to fair market value. After that, whenever an asset is sold, if the sale price exceeds the stepped-up amount, the investor will pay income tax on the difference. This eliminates capital gains tax on any appreciation that occurs after the 30-year holding period. |
| Rural designation | This was not part of the initial legislation creating OZs, but provisions in OBBA apply to the existing first-generation OZ tracts that meet the criteria. | Tracts are considered rural if they are not:
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| Benefits of investing in rural tracts |
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The Arizona Commerce Authority will seek input from cities, counties and tribes about which eligible census tracts should be nominated for OZ 2.0 status. If you are a community or tribal nation that is interested in submitting for Opportunity Zone status, there are many ways to get involved.
If you have additional questions regarding Arizona’s Opportunity Zones, please contact us at [email protected].