Rural Opportunity Zones: New Investment Pathways With Purpose (And Proper Documentation)
Picture this: America’s rural communities—places where the grain elevator is the tallest building for miles and everyone waves at passing cars—have suddenly become the focus of sophisticated investment strategies. Thanks to the One Big Beautiful Bill Act of 2025 (OBBA), rural opportunity zones now offer enhanced tax incentives that make investing in these communities not just good for the soul, but potentially excellent for the bottom line.
Understanding the Rural Opportunity Zone Framework
Rural opportunity zones are federally designated areas that qualify for special tax treatment when investors channel capital gains into local projects. The new regulations define “rural” as areas outside towns with populations over 50,000, plus additional income and poverty criteria. Currently, around 3,300 zones qualify under these updated rural designations.
The program works through Qualified Opportunity Funds (QOFs)—investment vehicles that must hold at least 90% of their assets in qualified opportunity zone property. In order to qualify for the tax benefits, investors must invest capital gains. These gains can be from any activity such as sale of publicly traded stock, real estate holdings, sale of a business, etc. For rural areas, the government has sweetened the deal with enhanced benefits: a 30% basis step-up (compared to 10-15% for urban zones) and reduced improvement requirements.
This is all part of the new Opportunity Zone 2.0 which we wrote about previously. The rural provisions are the most exciting part of the new law us and where we think there is significant opportunity particularly if balanced with smart development to preserve the charm and character of these communities.
Operating Business Rules: The Technical Framework
Operating businesses in opportunity zones must navigate several specific tests to qualify for benefits. Here’s how the system works:
The Five Key Tests for Qualified Opportunity Zone Businesses (QOZBs)
1. The 70% Tangible Property Test
At least 70% of the business’s tangible property must be “qualified opportunity zone business property” (QOZBP). This includes equipment, buildings, and machinery acquired after December 31, 2017, that either begins original use in the zone or receives substantial improvement.
2. The 50% Gross Income Test
The business must derive at least 50% of its gross income from activities within the opportunity zone. The regulations provide three safe harbors to meet this requirement:
- Hours-based: 50% of employee/contractor hours worked in the zone
- Cost-based: 50% of service payments for work performed in the zone
- Functions-based: Management, operations, and necessary tangible property located in the zone
3. The 40% Intangible Property Test
At least 40% of the business’s intangible property (patents, trademarks, goodwill) must be used in the active conduct of business within the zone.
4. The 5% Financial Property Limit
No more than 5% of the business’s property (by basis) can be non-qualified financial assets, though reasonable working capital held for up to 31 months is exempted.
5. The Sin Business Prohibition
QOZBs cannot operate prohibited businesses including golf courses, massage parlors, racetracks, gambling facilities, or stores principally selling alcohol for off-premises consumption. However, businesses can derive up to 5% of gross income from these activities under a de minimis rule.
Working Capital Safe Harbor Rules
Operating businesses benefit from extended deployment timelines. The 60-month working capital safe harbor allows businesses to hold cash for longer periods while developing operations. This requires:
- Written designation of funds for QOZ business development
- A written schedule for deployment within 31 months
- Substantial compliance with the schedule (delays from government approvals don’t violate the rules)
Real Estate Investment Examples
When it comes to real estate investment in these areas here are a few examples. This is not an exhaustive list but something to get your creative juices flowing as you start thinking about investing in these areas.
The balance here will be to preserve the character of the community as it revitalizes and coincides with local government and its expanding tax base brought about by these incentives.
Residential Development
- Converting abandoned main street buildings into affordable housing units
- Developing workforce housing for agricultural and manufacturing employees
- Rehabilitating historic structures into mixed-use residential/commercial spaces
Commercial Real Estate
- Transforming unused industrial buildings into modern manufacturing facilities
- Creating retail centers anchored by essential services like grocery stores and pharmacies
- Developing agritourism facilities that showcase local agriculture while providing lodging
Infrastructure Projects
- Building broadband infrastructure and technology centers
- Developing cold storage and distribution facilities for agricultural products
- Creating transportation hubs that connect rural areas to broader markets
Qualifying Business Examples
When it comes to operating businesses here are a few examples. These are again only for illustrative purposes and not designed to be an exhaustive list but something to get your creative juices flowing as you start thinking about investing in these areas.
Manufacturing and Production
- Solar panel manufacturing facilities: Companies producing renewable energy equipment can qualify, benefiting from both opportunity zone incentives and clean energy tax credits
- Food processing plants: Agricultural processing facilities serving local farming communities
- Precision agriculture technology: Companies developing farming equipment and software
Energy Projects
- Solar farms: Utility-scale solar installations qualify as QOZBs, combining opportunity zone benefits with federal renewable energy incentives. The energy sector is particularly well-suited because installations require substantial tangible property within the zone. This is particularly interesting as we look for alternative energy to power data centers needed to fuel current technological advancements.
- Wind energy projects: Similar to solar, these capital-intensive projects meet the tangible property requirements
- Energy storage facilities: Battery storage and grid infrastructure projects
Service Businesses
- Rural healthcare clinics: Medical practices serving underserved communities
- Veterinary services: Essential businesses in agricultural areas
- Technology services: Broadband providers, IT services, and agricultural tech support
Retail and Hospitality
- Farm-to-table restaurants: Establishments sourcing locally and serving on-premises (avoiding sin business restrictions)
- Agricultural supply stores: Equipment, seed, and feed retailers
- Rural co-working spaces: Shared office facilities for remote workers and entrepreneurs
Enhanced Rural Benefits: The Technical Details
Rural opportunity zones receive preferential treatment in several ways:
Reduced Improvement Thresholds
Rural properties need only 50% substantial improvement (compared to 100% for many urban properties), making renovation projects more financially feasible.
Enhanced Tax Benefits
- 30% basis step-up after five years (compared to 10% for regular zones)
- Additional 5% step-up after seven years for rural investments specifically
- Permanent capital gains exclusion on appreciation after ten years
Extended Safe Harbors
Rural businesses receive more time for capital deployment, acknowledging the longer development timelines common in less dense markets.
How Zones Are Selected:
Every 10 years, each state’s governor nominates eligible census tracts for Opportunity Zone status. The maximum is the greater of 25% of that state’s low-income tracts or 25 tracts total.
A tract must generally have a median family income that does not exceed 70% of the statewide (for non-metro areas) or metropolitan area median family income or have a poverty rate of at least 20% (with some additional limits on higher-income tracts).
For rural zones, the area must not be in or adjacent to a town/city with over 50,000 residents.
The prior rule allowing for adjacent (“contiguous”) tracts to be designated has been eliminated, so only areas that fully meet the criteria qualify.
The selected tracts are reviewed and finalized by the U.S. Treasury Department/IRS and then published.
Timing and Designation Period:
The first new round of designations under the 2025 law is scheduled for July 1, 2026 (state submissions), with the new zones taking effect January 1, 2027.
Each designation is valid for 10 years. After that, the process repeats, using new census data to update which areas are eligible.
During this cycle, investors can make new qualifying investments with full program benefits for any project sited in a designated zone.
Community Impact Considerations
While the tax benefits are clear, the community impact varies significantly. Research on existing opportunity zones shows that investment tends to concentrate in areas that are “distressed but accessible”—places with good infrastructure and growth potential. Truly remote rural areas may see less investment despite qualifying for the program.
Positive Impacts
- Job creation in manufacturing and service businesses
- Infrastructure improvements and building rehabilitation
- Increased tax base for local governments
- Enhanced services and amenities for residents
Potential Concerns
- Investment may favor projects that serve outside markets rather than local needs
- Property value increases can affect housing affordability for existing residents
- Limited oversight mechanisms to ensure community benefit
Practical Implementation
For Investors
The opportunity zone program requires careful structuring and ongoing compliance. QOFs must conduct semi-annual testing to maintain the 90% asset threshold. Documentation requirements are extensive, and the new rural designations add complexity to qualifying calculations.
For Communities
Rural communities can influence outcomes by engaging with potential investors early, advocating for projects that serve local needs, and ensuring development aligns with community planning goals. The most successful OZ projects maintain close community relationships through structured steering committees and regular stakeholder input.
Looking Forward
The permanent nature of rural opportunity zones, with rolling 10-year designations, creates long-term certainty for investors while providing ongoing opportunities for rural development. Success will depend on matching investor capabilities with genuine community needs—turning tax policy into meaningful economic development.
Whether you’re an investor seeking tax-advantaged returns or a rural community leader hoping to attract beneficial development, the enhanced rural opportunity zone program offers new possibilities. The key is approaching these investments with both financial discipline and community awareness, ensuring that tax benefits translate into lasting positive impact.
The grain elevator may still be the tallest building in town, but with thoughtful investment, it might soon anchor a thriving ecosystem of modern agriculture, clean energy, advanced manufacturing, and vibrant Main Street businesses.
Your Next Steps: Join the Rural Renaissance
If You’re an Investor:
The window of opportunity is now. With the first new round of rural opportunity zones launching January 1, 2027, and state nominations beginning July 1, 2026, now is the time to position your capital for maximum advantage.
Consider these action items:
- Identify target markets: Research rural areas in states where you have expertise or existing relationships. Focus on zones with existing infrastructure, motivated local leadership, and clear development potential
Assemble your team: Engage experienced tax advisors, attorney’s familiar with OZ regulations, and local partners who understand community dynamics
- Structure your QOF: Whether you’re establishing your own fund or investing in an existing one, ensure proper documentation and compliance from day one
- Think long-term: The best returns come from holding for the full 10-year period. Build projects that can sustain value over a decade
- Partner with communities: Success stories consistently feature investors who work closely with local stakeholders, not against them
If You’re a Rural Community Leader:
Don’t wait for investment to find you—be proactive in positioning your community for success.
Take these steps now:
- Get organized: Form a community development committee that includes business owners, local government, and civic organizations
- Know your data: Understand which census tracts in your area qualify and be ready to make the case to your governor’s office when nomination periods open
- Develop a vision: Create a clear development plan that identifies priority projects, addresses community needs, and maintains local character
- Build relationships: Start conversations with potential investors, neighboring communities that have succeeded, and state economic development offices
- Establish guardrails: Work with local planning boards to ensure development regulations protect community interests while remaining investment-friendly
For Both Investors and Communities:
The rural opportunity zone program represents a rare alignment of financial incentive and community need. When executed thoughtfully, these investments can revitalize Main Streets, create meaningful jobs, modernize infrastructure, and preserve the character that makes rural America special.
The difference between extractive investment and transformative development often comes down to one thing: genuine partnership. Investors who take time to understand local needs and communities that create welcoming environments for responsible development will both benefit.
The opportunity is real. The tax benefits are substantial. The potential for positive impact is enormous.
