New Rural Opportunity Zone Tax Break: 50% Improvement Rule Explained for Business Owners

Overview

IRS Notice 2025-50 implements a significant expansion of Opportunity Zone benefits for businesses and investors developing property in rural areas. Under prior law, tangible property located in a Qualified Opportunity Zone was treated as substantially improved only if capital improvements exceeded 100% of the property’s adjusted basis. The One Big Beautiful Bill Act reduced this threshold to 50% for property located entirely within a rural Opportunity Zone.

This change materially lowers the cost and risk required to qualify Opportunity Zone property and opens the door for more feasible redevelopment projects in rural communities. For business owners, real estate investors, and developers evaluating long term capital deployment, this update works alongside other recent incentives such as Qualified Production Property to reshape planning decisions.

What Changed Under Notice 2025-50

Prior to July 4, 2025, property acquired in a Qualified Opportunity Zone had to be improved by an amount exceeding 100% of the property’s adjusted basis within a thirty month period. Section 70421(c)(4)(C) of the One Big Beautiful Bill Act amended Internal Revenue Code section 1400Z-2(d)(2)(D)(ii) to reduce that requirement to 50% for property located in Opportunity Zones that are comprised entirely of rural areas.

• The substantial improvement threshold is reduced from 100% to 50%
• The rule applies only to Opportunity Zones designated in 2018 that are entirely rural
• The new rule applies to determinations made on or after July 4, 2025
• The improvement period remains thirty months

What Qualifies as a Rural Opportunity Zone

Notice 2025-50 provides a detailed definition of rural area based on 2020 Census data. A rural area is any area other than a city or town with a population greater than 50,000 inhabitants and any urban area contiguous or adjacent to such a city or town.

Treasury identified 3,309 Qualified Opportunity Zones from the original 2018 designations that are comprised entirely of rural areas. Only property located within these zones is eligible for the reduced 50% improvement threshold.

California Rural Opportunity Zones

California contains a meaningful number of Qualified Opportunity Zones that are comprised entirely of rural areas under IRS Notice 2025-50. These zones are concentrated in agricultural and inland regions where redevelopment economics are often sensitive to capital requirements.

Counties with eligible rural Opportunity Zones include portions of the Central Valley, Inland Empire, and Northern California, such as Tulare, Kern, Fresno, Kings, Madera, Merced, Imperial, Siskiyou, and Lassen counties. For businesses operating in these areas, the reduced 50% improvement threshold can materially change whether a project qualifies for Opportunity Zone treatment.

California business owners considering facility expansion, processing operations, lodging, or redevelopment projects in rural zones should evaluate this rule early, as proper structuring and timing of capital improvements is critical.

Why This Matters for Business Owners and Investors

The 50% improvement rule significantly reduces capital requirements for qualifying Opportunity Zone projects. This is particularly impactful for operating businesses, manufacturers, agricultural processors, hospitality operators, and real estate developers investing in rural communities where property values and redevelopment margins are tighter.

• Lower required capital investment to qualify Opportunity Zone property
• Expanded feasibility of rural redevelopment projects
• Improved cash flow modeling for Opportunity Zone investments
• Stronger alignment with Qualified Production Property incentives for facilities and equipment

When combined with accelerated depreciation available under Qualified Production Property , rural Opportunity Zone projects may achieve materially better after tax returns than under prior law.

See current federal rates on the Economic Dashboard .

Planning Considerations

Taxpayers should confirm that the property is located in a qualifying rural Opportunity Zone and carefully track capitalized improvement costs during the thirty month measurement period. Proper structuring at acquisition is critical, as failure to meet the 50% threshold can disqualify the property from Opportunity Zone treatment.

Schedule a Consultation to evaluate whether this Opportunity Zone rule and related QPP incentives apply to your business or real estate investment.