Notice 2025-50

Notice 2025-50

SECTION 1. PURPOSE

This notice provides guidance to taxpayers applying the substantial improvement provision of § 1400Z-2(d)(2)(D)(ii) of the Internal Revenue Code (Code),1 as amended by § 70421(c)(4)(C) of Public Law 119-21, 139 Stat. 72, 227 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), for certain improvements to property located in a qualified opportunity zone (QOZ) listed in Notice 2018-48, 2018-28 I.R.B. 9, or Notice 2019-42, 2019-29 I.R.B. 352, that is comprised entirely of a “rural area.” This notice does not provide any guidance regarding the forthcoming round of opportunity zone nominations, certifications, and designations authorized by the OBBBA, which the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) will address in the future.

SECTION 2. BACKGROUND

.01 Qualified Opportunity Zones under the TCJA

Section 13823 of Public Law 115-97, 131 Stat. 2054, 2183 (December 22, 2017), commonly known as the Tax Cuts and Jobs Act (TCJA), amended the Code by adding §§ 1400Z-1 and 1400Z-2. Section 1400Z-1 outlines the process by which a population census tract located in the 50 States, the District of Columbia, or the U.S. territories that is a low-income community is nominated to be a QOZ by the chief executive officer of a State, the District of Columbia, or a territory, and then certified and designated as a QOZ by the Secretary of the Treasury or the Secretary’s delegate (Secretary). Revenue Procedure 2018-16, 2018-9 I.R.B. 383, provided guidance on the nomination process.

Notice 2018-48 and Notice 2019-42 list census tracts that were nominated in 2018, which the Secretary certified and designated as QOZs (2018 QOZs). The 2018 QOZs were based on census tracts and boundaries based on the 2010 Decennial Census. No census tract has been designated as a QOZ since the designations of the 2018 QOZs.

Under § 1400Z-2(d)(1), the term “qualified opportunity fund” (QOF) means any investment vehicle organized as a corporation or a partnership for the purpose of investing in “qualified opportunity zone property” (QOZP) that holds at least 90 percent of its assets in QOZP. Pursuant to § 1400Z-2(d)(2)(A)(iii), QOZP includes, among other things, “qualified opportunity zone business property” (QOZBP).

.02 Substantial Improvement of Property Generally

Under § 1400Z-2(d)(2)(A) and (D)(i)-(ii), if leased or owned tangible property is used in the trade or business of an eligible entity (that is, a QOF or a qualified opportunity zone business as defined in § 1400Z-2(d)(3)), then the property may qualify as QOZBP only if, among other requirements, the original use of the tangible property in the 2018 QOZ began with that eligible entity or that eligible entity substantially improves the property. Such tangible property is treated as substantially improved only if, during any 30-month period following the acquisition of the property (30-month period), additions to the basis of the tangible property in the hands of the eligible entity exceed an amount equal to 100 percent of the eligible entity’s adjusted basis in the tangible property at the beginning of the 30-month period. See section 2.03 of this notice regarding the substantial improvement of property in a 2018 QOZ comprised entirely of a rural area.

.03 Substantial Improvement of Property in QOZ Comprised Entirely of a Rural Area

Section 70421(c)(4)(C) of the OBBBA amended § 1400Z-2(d)(2)(D)(ii) to modify the general substantial improvement threshold for improvements to property located in a QOZ that is comprised entirely of a rural area. The OBBBA amendment reduced the substantial improvement threshold for required additions to the basis for such property from 100 percent to 50 percent. This OBBBA amendment took effect on July 4, 2025.

.04 Definition of Rural Area

Section 70421(c)(2) of the OBBBA codifies a definition of “rural area” in § 1400Z-2(b)(2)(C)(ii) applicable to amounts invested in QOFs after December 31, 2026. Under such definition, a “rural area” is defined as “any area other than—(I) a city or town that has a population of greater than 50,000 inhabitants, and (II) any urbanized area contiguous and adjacent to a city or town described in subclause (I).” This definition is the same as the one provided by § 343(a)(13)(A) of the Consolidated Farm and Rural Development Act of 1961 (Con Act), Public Law 87-128, 75 Stat. 294, as subsequently amended, codified at 7 U.S.C. 1991(a)(13)(A), and used by the United States Department of Agriculture (USDA) in its application of programs across the Rural Development Mission Area, including the Rural Business Cooperative Service.

For the 2010 Decennial Census, the Bureau of the Census (Census Bureau) classified “urban areas” as either “urban clusters” or “urbanized areas.” Urban clusters were urban areas with at least 2,500 people but fewer than 50,000 people, and urbanized areas were urban areas with 50,000 or more people.2 For the 2020 Decennial Census, the Census Bureau changed its classification criteria of urban areas. As part of this change, urban areas are now based on a minimum threshold of 2,000 housing units or 5,000 people. Moreover, the Census Bureau stopped distinguishing urban areas between those that are “urban clusters” and those that are “urbanized areas.” Instead, the 2020 Decennial Census designates only “urban areas.”3

Prior to the Census Bureau’s 2020 change in methodology, the USDA relied on 2010 Decennial Census data and definitions to identify urbanized areas for programs that referenced urbanized areas. Following the 2020 Decennial Census and the change in the definition of rural and urban, Census Bureau data, as previously described, no longer provides whether a specific area is an “urbanized area.”4 In 2023, the USDA determined that because it is obligated by statute to use the most recent Decennial Census data for certain programs, and the Census Bureau no longer identifies urbanized areas, the use of 2010 Decennial Census data by the USDA would be contrary to congressional instruction to use the most recent data contained in statutes administered by the USDA that incorporate population-based definitions of “rural.” Accordingly, the USDA has adopted the methodology of the 2020 Decennial Census for its rural development programs.

While the definition of rural area in § 1400Z-2(b)(2)(C)(ii), as enacted by the OBBBA, is the same as that of the Con Act and 7 U.S.C. 1991(a)(13)(A), the OBBBA definition does not include the additional statutory provisions for defining a rural area that are found in 7 U.S.C. 1991(a)(13)(D) through (I). Hence, the methodology this notice applies for determining a rural area for purposes of § 1400Z-2(b)(2)(C)(ii) is broadly similar to the methodology used by the USDA for its rural development programs, but does not correspond in all respects to the additional details provided in 7 U.S.C. 1991(a)(13).

SECTION 3. SCOPE

This notice applies to all tangible property located in a 2018 QOZ that is comprised entirely of a rural area (as defined in section 4 of this notice) that has been, or is in the process of being, substantially improved (as described in section 5 of this notice). The Treasury Department and the IRS have determined that there are 3,309 2018 QOZs that are comprised entirely of a rural area based on 2020 Decennial Census data. See the Appendix for a list of these 2018 QOZs.

SECTION 4. MEANING OF “RURAL AREA” FOR 2018 QOZS

For purposes of applying the substantial improvement test of § 1400Z-2(d)(2)(D)(ii) with respect to 2018 QOZs:

.01 A “rural area” is any area other than—

(1) A city or town that has a population of greater than 50,000 inhabitants (as defined in section 4.02 of this notice), and

(2) Any urbanized area (as defined in section 4.03 of this notice) contiguous and adjacent (as defined in section 4.04 of this notice) to a city or town described in section 4.01(1) of this notice.

.02 A “city or town that has population greater than 50,000 inhabitants” is determined, other than for the State of Hawaii and Commonwealth of Puerto Rico, as an incorporated city and town with a resident population greater than 50,000 in the 2020 Decennial Census. For the State of Hawaii and Commonwealth of Puerto Rico, a “city or town that has a population greater than 50,000 inhabitants” is determined as a Census Designated Place with a resident population greater than 50,000 in the 2020 Decennial Census.

.03 An “urbanized area” means any Census-Bureau-designated urban area.

.04 “Contiguous” and “adjacent” are geographic terms referring to two or more areas that share either a common boundary or at least one common point.5

SECTION 5. APPLICATION

For any determination made on or after July 4, 2025, as to whether any tangible property located in a 2018 QOZ comprised entirely of a rural area meets the substantial improvement test described in § 1400Z-2(d)(2)(D)(ii), the substantial improvement test is satisfied if the additions to basis with respect to such property in the hands of the QOF or a qualified opportunity zone business exceed an amount equal to 50 percent of the adjusted basis of such property at the beginning of the 30-month period described in § 1400Z-2(d)(2)(D)(ii).

SECTION 6. DRAFTING INFORMATION

The principal author of this notice is Maria Castillo Valle of the Office of Associate Chief Counsel (Income Tax & Accounting). For further information regarding this notice contact Ms. Castillo Valle at (202) 317-7006 (not a toll-free call).

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