Harvesting Potential in Rural American OZs: U.S. Treasury Update on OZ Tax Incentive

The U.S. Department of the Treasury recently released its updated Office of Tax Analysis Working Paper, detailing administrative tax data on the Opportunity Zone (OZ) program through Tax Year 2024. As detailed in a recent analysis by the Economic Innovation Group (EIG), the data paints a clear picture of success.   The OZ tax incentive has expanded dramatically, driving significant capital into low-income communities across the nation.

With $112 billion in cumulative qualified investment deployed and 77% of all designated zones receiving capital through 2024 (up from 48% in 2020), the program has established an impressive footprint of social and community impact.

For investors looking ahead to the OZ 2.0 regime taking effect on January 1, 2027, under the One Big Beautiful Bill Act (OBBBA), the Treasury's report offers vital insights—particularly regarding the untapped, highly investable nature of rural OZs.

Here is what the latest Treasury data reveals about rural America and why rural OZs are primed for a major surge in capital.

Rural OZs Are Far More Investable Than Policymakers Believed

A common misconception during the early years of the OZ program was that rural census tracts would be overlooked in favor of dense, high-cost urban real estate. The Treasury’s updated data officially dispels that myth.

• Broad Geographic Participation: An impressive 77% of rural OZs received qualified investment through 2024, matching the national participation rate for urban zones.
• Meaningful Capital Deployment: Rural tracts represent roughly 38% of all designated OZs and attracted $16.8 billion in Qualified Opportunity Zone (QOZ) property through 2024 (16.1% of total QOZ property), up from 12.6% in 2020.
• Smaller Deals, High Breadth: While the average rural OZ with investment received $7.3 million compared to $23.3 million for non-rural OZs, the high participation rate proves that viable, bankable projects rightsized for the community exist across rural America.

Why Rural Incentives Are Still Warranted

Despite high participation rates, capital density in rural areas still lags urban centers on a per-zone basis ($7.3 million vs. $23.3 million). Rural communities face unique structural financing gaps, lower baseline asset values, and localized market dynamics. The data demonstrates that while rural OZs are highly investable, targeted policy enhancements remain necessary to scale deal size and further bridge the rural equity gap.

Why Investors Could Pivot to Rural OZs in OZ 2.0

Historical tax data reveals a key investor behavior: OZ investors heavily overweight the basis step-up benefit.

During OZ 1.0, tax filings spiked significantly in 2019 and 2021—the final years for investors to secure the original 7-year (15%) and 5-year (10%) basis step-up deadlines. When a direct tax reduction is on the table, investors moved fast.

Under the upcoming OZ 2.0 framework (post-2026), Congress intentionally restructured basis step-up incentives to favor rural America:

• Standard OZ 2.0 Step-Up: Capital deployed in standard (urban) OZs will receive a 10% basis step-up after a 5-year hold.
• Rural OZ 2.0 Step-Up: Capital deployed into Qualified Rural Opportunity Funds (QROFs) will receive a 30% basis step-up after a 5-year hold.
• Lower Development Hurdles: Rural OZs also feature a reduced 50% substantial improvement threshold for existing buildings (compared to 100% in non-rural zones), dramatically improving project economics for value-add deals.

The 30% rural OZ step-up benefit seems to be garnering a lot of attention among savvy OZ investors.  We liken it to a Dire Strait type “Money for Nothing” strategy as obtaining this tax benefit has no direct out of pocket costs to investors so it’s discrete return is infinite.

With tax-conscious investors prioritizing the maximization of this basis adjustment, the rural OZ 3x step-up advantage (30% vs. 10%) is forcing fund managers and capital allocators to give rural OZs a much closer look starting in 2027.

Changing OZ 2.0 Landscape

As we transition from the original OZ 1.0 program to the permanent, rolling 10-year investment cycles of OZ 2.0, the landscape is shifting dramatically. Under the current data through Tax Year 2024, the program has attracted $112 billion in total cumulative investment, with $16.8 billion flowing into rural OZs. Furthermore, 77% of all designated zones, including 77% of rural OZs, have seen active participation. Moving forward, the eligibility rules are tightening, with low-income community criteria capped at 70% of the area median income.

For investors, the tax incentives are also evolving. The original 10% standard basis step-up expired at the end of 2021. However, the new OZ 2.0 regime introduces a flat 5-year hold for a 10% standard step-up, and an impressive 30% step-up for rural OZs after the same 5-year period. Additionally, the substantial improvement threshold, previously set at 100% of non-land basis across all zones, drops to 50% for rural OZs under the new rules, while remaining at 100% for non-rural projects.

Warren Buffet’s partner Charlie Munger was fond of saying, "Show me an incentive and I'll show you an outcome." The hard and soft data confirm that OZ 1.0 investments of $112 billion have transformed lives in community after community that may have otherwise been overlooked. We think the permanency of OZ 2.0 and the more flexible 5-year deferral and basis step-up regime will attract more capital and benefit more OZs, particularly rural American communities.

Promised Land OZ’s Unique Position

Rural OZs is Promised Land OZ’s sweet spot.  OZ 2.0 is a win-win for the investors and rural communities we serve. 

Promised Land OZ won’t need to materially adjust our investment strategy.   Our farmland OZ strategy will directly benefit from the new rural OZ incentives – 30% step-up in basis and the lower 50% improvement test – simply by executing our tried-and-true investment process in a similar manner.

We believe we are one of a few, perhaps only, institutional fund managers solely dedicated on rural OZs under the OZ 1.0 regime.  Our prior two funds are a testament to our unique ability to meet the 90% qualifying rural asset requirement for Qualified Rural Opportunity Zone Fund (QROF) investors to receive the attractive 30% step-up in tax basis. Across our two prior funds, 100% of our 13 historical OZ farm investments were in rural OZs.  Applied retroactively, we would have achieved the necessary QROF designation for investors to achieve the compelling 30% “Money for Nothing” tax benefit.

Lastly, the U.S. farmland opportunity set is vast representing a $4 trillion, largely non-institutional asset class.  There will undoubtedly be plenty of high-quality farmland located in OZ 2.0 designated tracts in which to apply our scalable and repeatable underwriting process.  We’re excited to play a role in harvesting potential in rural American OZs.

Author: Dylan Gardner