The Treasury Department and Internal Revenue Service have released new guidance on Qualified Opportunity Zone investments in rural areas, implementing changes from the One, Big, Beautiful Bill Act (Pub. L. 119-21) signed earlier this year. The guidance clarifies how taxpayers may qualify for tax incentives when investing in underserved rural communities through these designated economic development zones.

Qualified Opportunity Zones (QOZs) are economically distressed areas where investors can defer and potentially reduce capital gains taxes by investing through special funds. The program was originally created in 2018 to encourage investment in underserved communities. Notice 2025-50 now provides specific rules for rural QOZs, including a reduced investment threshold intended to reflect the distinct conditions of rural development.

“These changes are intended to offer enhanced QOZ tax incentives for investing in underserved rural areas and to address the unique challenges of rural development,” according to the IRS announcement. Of the 8,764 Opportunity Zones nationwide, 3,309 are now classified as entirely rural under the new definitions.

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New Definition of Rural Areas

Under the updated rules in IRS Notice 2025-50, a rural area is defined as any location outside cities or towns with populations over 50,000, and not part of an urbanized area that is contiguous and adjacent to a larger city or town. This classification applies across all U.S. states, the District of Columbia, and U.S. territories.

The rural designation now determines how properties in these zones qualify for tax benefits. Previously, all Opportunity Zones operated under the same improvement requirements regardless of location.

Reduced Investment Threshold for Rural Properties

One of the most significant changes involves the substantial improvement threshold for properties in rural Opportunity Zones. According to IRS Notice 2025-50, as of July 4, 2025, properties in zones classified as entirely rural must meet a 50% substantial improvement threshold, based on the property’s original basis, to qualify for tax benefits.

This represents a substantial reduction from the previous 100% threshold that applied to all Opportunity Zone properties. The lower requirement reduces the level of investment needed to meet qualification standards for rural properties.

The reduced threshold applies to all tangible property located in rural QOZs on or after July 4, 2025, that has been or is being substantially improved. This timing aligns with the effective date of the One, Big, Beautiful Bill Act (Pub. L. 119-21).

Impact on Investment Strategy

The new rural provisions may broaden the range of potential development projects in Opportunity Zones. The lower threshold may result in more rural projects meeting qualification standards while maintaining existing tax deferral and exclusion provisions.

The IRS has indicated that additional guidance will be issued regarding the next round of Opportunity Zone designations authorized under the One, Big, Beautiful Bill Act (Pub. L. 119-21). This includes updated nomination and designation procedures that governors will use to select new zones.

Many of the nation’s Opportunity Zones have seen limited investment for decades, which the IRS noted as context for creating the enhanced rural incentives.

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