LIHTC and Opportunity Zones after the 2025 law: how pairing works

Opportunity Zones and the LIHTC reward different things. LIHTC pays a credit for keeping rents restricted for 15 years. OZ pays for keeping capital gains invested in a low-income area for 5 to 10 years or more, and rewards appreciation. Pairing them works when the structure gives each investor what it’s paying for without breaking either rulebook.

What the 2025 law did

All from Pub. L. 119-21 sec. 70421, amending 26 U.S.C. 1400Z-1 and 1400Z-2:

Change	Rule	Applies to
Permanent, decennial zones	A “decennial determination date” of July 1, 2026 and every 10 years after	Designations after enactment
New zone life	A zone is in effect from the January 1 after Treasury certifies it until the day before the 10-year anniversary of that date	New designations
Narrower low-income community test	Median family income not over 70% of the state or metro median, or a poverty rate of at least 20% with median family income not over 125%	New designations; the contiguous-tract rule is repealed
Rolling deferral	Deferred gain is included at the earlier of the sale of the QOF investment or 5 years after the investment	Amounts invested after December 31, 2026
5-year basis step-up	10% of the deferred gain; 30% for a qualified rural opportunity fund	Same
10-year exclusion	After 10 years, election to take basis equal to fair market value; for investments held 30 years or more, basis is fixed at FMV on the 30-year date	Same
Rural substantial improvement	50% of adjusted basis instead of 100% for property in a zone made up entirely of rural area	Effective on enactment
Reporting	New annual QOF and investor returns (new sec. 6039K)	Per the statute

“Rural area” here means any area other than a city or town over 50,000 people and the urbanized area next to it.

Timing in plain terms

• Gains invested by December 31, 2026 fall under the old rules, including recognition of deferred gain at the end of 2026 under the prior statute. That makes late-2026 investments mostly about the 10-year exclusion.
• Gains invested after December 31, 2026 get the new rolling 5-year deferral and step-up.
• New zones can’t be in effect before the January 1 after certification. Treasury certifies nominations made under the new low-income community test; HUD’s QCT list and the OZ list are different lists, so check both.

Why LIHTC and OZ fit, and where they collide

Feature	LIHTC	OZ	Fit
Who invests	Banks and insurers buying credits	Holders of capital gains	Different investors, so usually two classes of equity
What they want	Credits and losses for 10 years; no recapture for 15	Deferral, step-up, and tax-free appreciation after 10 years	OZ investor takes residual cash flow and back-end value
Hold period	15-year compliance period; 30+ year extended use	10 years for the exclusion	A 10-year OZ exit inside the LIHTC compliance period needs a buyer that keeps the building qualified
Asset tests	Building must be a qualified low-income building	QOF must hold at least 90% of its assets in QOZ property; substantial improvement or original use required	New construction meets original use; acquisition-rehab must double basis (or 50% in a rural zone) within 30 months
Exit value	Capped by restricted rents	Exclusion on appreciation	Restricted rents limit appreciation, so OZ upside comes mostly from deferral and step-up

The most common LIHTC/OZ pairings:

1. Mixed-income projects where the market-rate units, or a market-rate building, create the appreciation OZ investors want, while the LIHTC building carries the credits.
2. OZ capital as a subordinate equity layer, filling part of the gap that would otherwise need soft loans. The OZ investor gets a preferred return and a share of residual value, and the credit investor keeps 99.99% of credits and losses through a special allocation structure that tax counsel signs off on.
3. Commercial or community space in a mixed-use project, financed separately with OZ equity (and sometimes New Markets Tax Credits, which section 70423 made permanent at $5 billion a year).

A worked view of the investor math

Assumptions only. An investor rolls $2,000,000 of capital gain into a QOF in March 2027, which invests in a LIHTC partnership as a subordinate member. The investment is held 10 years.

Event	Under the new rules
March 2027	$2,000,000 of gain deferred; QOF basis starts at zero
March 2032 (5 years)	Basis steps up by 10% of the deferred gain, $200,000; at the same time the deferred gain is included in income. Taxable amount is the lesser of the deferred gain or the investment’s FMV, less basis: up to $1,800,000
March 2037 (10 years)	Election to step basis up to FMV; any appreciation is excluded

In a qualified rural opportunity fund the 5-year step-up would be 30%, $600,000, so up to $1,400,000 is included. Whether any of this beats a soft loan depends on the return the OZ investor expects from restricted-rent cash flow, which is modest.

Practical checks before you pair them

• Map the site twice: the OZ list for the round you rely on, and the QCT/DDA lists for the 130% boost. They overlap in many low-income tracts but aren’t the same.
• Align exits. If the OZ investor wants to sell at year 10 to take the exclusion, the buyer must keep the building qualified, or the disposition could trigger recapture for the LIHTC investor. Many deals give the OZ investor a put to the general partner instead.
• Watch the 70% tangible property and 90% asset tests in the Treasury regulations under 1400Z-2 for the QOF and any QOZ business; LIHTC partnerships hold real estate, which helps.
• Don’t count on proposals. The AHCIA items and the dropped rural/Native basis boost are not law as of October 30, 2026. See 2026 law changes.

If OZ equity is part of your stack, the Janover Capital desk can size the senior debt around the extra equity layer.