ARTICLE | October 14, 2025
Do you have property investments or thinking about investing in Qualified Opportunity Zones (QOZ)? If so, new IRS guidance could impact your tax compliance obligations and planning strategies. Notice 2025-50, released September 30, 2025, provides clarification on rural QOZ definitions and substantially reduces improvement requirements for qualifying properties.
Immediate Compliance Implications
The most significant change affects the substantial improvement test for properties in rural QOZs. Effective July 4, 2025, the required improvement threshold dropped from 100% to just 50% of the property's adjusted basis within the 30-month testing period. This retroactive effective date means some clients may now qualify for benefits they previously couldn't achieve.
The IRS has identified 3,309 QOZ census tracts as qualifying rural areas using 2020 Census data. If your property is located in one of these designated tracts, you need to reassess your improvement calculations and potentially amend previous determinations.
Tax Planning Opportunities and Pitfalls
Beyond immediate compliance corrections, this guidance creates new tax planning possibilities. The reduced improvement requirement means better cash flow management for ongoing projects and new investment opportunities with lower capital requirements. However, the retroactive application also means potential compliance missteps if improvements were calculated incorrectly.
Additionally, the overlap period between existing and new QOZ designations requires careful planning to optimize investment timing and compliance strategies.
Action Items for QOZ Investors
First, determine if your properties are located in the 3,309 identified rural QOZs. Second, recalculate your substantial improvement tests using the new 50% threshold. Third, review your documentation and compliance procedures to ensure alignment with the updated requirements. Time-sensitive decisions may be needed before year-end to optimize your tax position.