Rev. Proc. 2026-14: OZ 2.0 Designation Rules
Issued by the IRS, Revenue Procedure 2026-14 provides critical guidance to State and territory Chief Executive Officers (CEOs) regarding the procedure for nominating population census tracts to be designated as Qualified Opportunity Zones (QOZs) effective January 1, 2027. This guidance implements the legislative changes enacted by the One, Big, Beautiful Bill Act (OBBBA).
Key Provisions and Changes
The revenue procedure outlines several significant shifts from the original OZ 1.0 framework, establishing a stricter, more targeted approach to zone designation for the program’s second decade (2027–2036).
1. Narrower Definition of Low-Income Communities (LICs)
Under the OBBBA, the definition of an eligible LIC has been tightened to ensure investments reach areas with the greatest economic need. The new criteria depend on whether the tract is located within a metropolitan area:
- Non-Metropolitan Tracts: Must have a median family income not exceeding 70% of the statewide median, OR a poverty rate of at least 20% and a median family income not exceeding 125% of the statewide median.
- Metropolitan Tracts: Must have a median family income not exceeding 70% of the metropolitan area median, OR a poverty rate of at least 20% and a median family income not exceeding 125% of the metropolitan area median.
2. Elimination of Contiguous Tracts
A major departure from OZ 1.0 is the complete elimination of the contiguous tract allowance. Previously, up to 5% of a state’s designated zones could be non-LIC tracts that were contiguous to an LIC QOZ. Under Rev. Proc. 2026-14, every nominated tract must independently qualify as an LIC.
3. The 25-Percent Limitation
States and territories are strictly limited in the number of tracts they can nominate. During the designation period, a state may nominate no more than 25 percent of its total eligible LICs.
- Exception: States with fewer than 100 eligible LICs may nominate up to 25 tracts total.
4. Qualified Rural Opportunity Funds (QROFs)
The guidance introduces the concept of the Qualified Rural Opportunity Fund (QROF). A QROF is a specialized QOF that holds at least 90% of its assets in Qualified Opportunity Zone Property (QOZP) located entirely within a rural area.
- A “rural area” is defined as any area outside a city/town with a population over 50,000 and outside any adjacent urbanized area.
5. Strict Nomination Timeline
The IRS has established a rigid timeline for the nomination process:
- Determination Period: State CEOs have a 90-day window beginning July 1, 2026, to submit their nominations via a new online IRS Nomination Tool.
- Extensions: A 30-day extension may be requested, pushing the deadline to October 28, 2026, at the latest.
- Consideration Period: The IRS then has 30 days (extendable by another 30 days) to certify and designate the nominated tracts.
6. Puerto Rico Transition
The special rule that automatically designated all LICs in Puerto Rico as QOZs under OZ 1.0 has been removed. Beginning July 1, 2026, the Governor of Puerto Rico must actively nominate tracts subject to the same 25-percent limitation as other states. Existing Puerto Rico QOZs remain in effect until December 31, 2027.
Strategic Implications for Investors and Developers
The transition to OZ 2.0 under Rev. Proc. 2026-14 requires immediate strategic shifts:
- Data-Driven Site Selection: With the elimination of contiguous tracts and stricter LIC definitions, developers must rely on precise, updated census data (2020-2024 ACS 5-Year estimates) to verify tract eligibility before committing capital.
- State-Level Advocacy: Because states can only nominate 25% of eligible tracts, competition for designation will be fierce. Project sponsors must actively engage with state economic development agencies before the July 2026 nomination window opens to ensure their target tracts are selected.
- Rural Focus: The creation of QROFs signals a strong legislative intent to drive capital into rural communities, potentially offering enhanced incentives or streamlined compliance for funds focusing on these areas.