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By Eddie Price| Principal, Cost Segregation
With the passage of the One Big Beautiful Bill Act (OBBBA), Opportunity Zones (OZ) have shifted from a temporary incentive to a permanent fixture, fundamentally altering how real estate investors should approach tax strategy. The bill creates new benefits specific to rural investments and updates how gains can be delayed, creating new opportunities to use Cost Segregation in OZ projects if the project is set up the right way.
KBKG Insight:
While the OBBBA enhances planning certainty for OZ investments, the use of Cost Segregation still requires careful consideration. Many OZ investors, especially those contributing only deferred capital gains, start with a zero basis in the Qualified Opportunity Fund (QOF), limiting their ability to use losses from a Cost Segregation study. However, when there is sufficient basis created by debt financing (particularly recourse or qualified non-recourse debt) or additional cash investment beyond deferred gains, Cost Segregation can become a powerful tool for accelerating depreciation deductions. Investors targeting rural OZs, which now offer a 30% basis step-up and reduced improvement thresholds, should work closely with tax advisors to structure deals that allow them to take full advantage of these new benefits. The key is having enough basis to actually absorb the accelerated losses generated.
Background
Originally introduced by the 2017 Tax Cuts and Jobs Act, OZs allowed investors to defer capital gains by reinvesting in QOFs. The new legislation makes the program permanent after 2026, introducing a rolling five-year deferral and enhancing benefits for rural areas, including a 30% basis step-up and a 50% improvement threshold.
However, a technical hurdle remains, as investors who only contribute deferred capital gains to a QOF receive an initial tax basis of zero. Without basis, they generally cannot benefit from the losses generated by Cost Segregation studies. Where a project includes additional equity investment or qualifying debt, a Cost Segregation study may be used to generate immediate paper losses, shelter income, and improve after-tax cash flow. Understanding the interplay between basis, partnership allocations, and depreciation is crucial.
Conclusion
Cost Segregation is not a one-size-fits-all solution for OZ projects. Investors must carefully evaluate their initial basis and financing structure to determine if accelerated depreciation will provide real tax benefits. For those with the right structure, especially in rural tracts with new incentives, the updated OZ rules create opportunities to combine deferral, exclusion, and depreciation into a potent tax strategy. Expect the effects of the OBBBA law to become clearer in the coming months.
In the meantime, contact KBKG if real estate investors or their tax preparers have any questions or need help understanding how these changes might impact OZ plans.
About the Author
Eddie Price | Principal – Cost Segregation
Eddie Price is a Principal with KBKG and currently oversees the Southern region and its Texas-based operations. He is a Certified Cost Segregation Professional (CCSP) with the American Society of Cost Segregation Professionals (www.ASCSP.org). Price currently serves as President of the ASCSP… Read More