What makes a fund rural
OZ 2.0 created a new type of fund, the qualified rural opportunity fund. To qualify, the fund holds at least 90% of its assets in Opportunity Zone property located in rural areas (IRC §1400Z-2, as amended by Public Law 119-21).
In general, a rural area is one outside cities and towns of more than 50,000 people and the urbanized areas next to them. Treasury guidance on the finer details is still coming, so confirm a specific location before you build a plan around it.
The rural label applies to the fund, not just one building. A fund that owns a rural lodge and a city apartment building has to look at its whole balance sheet. If less than 90% of its assets sit in rural Opportunity Zone property, it doesn't get the 30% treatment.
What the 30% step-up means in dollars
All OZ 2.0 investments defer the gain for five years, or until you sell. At the five-year mark, part of that gain is forgiven. In a standard fund, 10% is forgiven. In a qualified rural fund, 30% is. Ashley's reaction to the rural rules: "For once the tax code is handing out gifts."
Example: you invest a $1 million gain in a rural fund. Five years later, $700,000 becomes taxable instead of $900,000. Hold at least ten years and the growth on the investment can also be free of federal capital gains tax.
For someone in a high bracket, that extra 20% of forgiven gain can be a meaningful amount of tax. It's the single biggest reason rural projects are getting a second look under OZ 2.0.
An easier test for improving property
When a fund buys an existing building, it usually has to substantially improve it. Normally that means adding more than the building's adjusted basis in improvements. Land is not counted. For rural property, the bar has been more than 50% of the building's basis since July 4, 2025.
On a building with a $500,000 basis, that's more than $250,000 of improvements instead of more than $500,000. For many small-town projects, that's the difference between a deal that works and one that doesn't.
Things to check before you commit
- Is the tract designated, or only eligible? Only designated zones count.
- Is it rural under the federal definition? Small towns near a larger city may not qualify.
- Can the fund keep 90% of its assets in rural property for the full hold, including cash waiting to be spent?
- Does the deal work on its own? A bigger tax benefit makes a good project better. It doesn't fix a weak one.
Ashley's rule of thumb: write the 90% rural commitment into the fund's documents from day one, and make sure every tract the fund reports on Form 8996 is rural. Answering these early helps protect the 30% treatment.
Who it fits
Rural zones fit projects that already belong outside big cities: lodges and outdoor hospitality, farm and agriculture businesses, small-town housing, and main-street businesses. Treasury's list includes about 8,400 rural-eligible tracts.
Ashley's reason for caring about these towns goes past the tax math. When you bring a dollar from outside into a small community, he says, "it makes that whole community be able to pass that same dollar around." His phrase for it: "That's capitalism with a purpose."
Eligible doesn't mean designated. A tract counts only after the state nominates it and Treasury certifies it. Check any location on the OZ 2.0 map, which flags rural tracts. If you're weighing a rural project, a 15-minute call can tell you quickly whether the numbers work.