Texas nominates 605 census tracts for Opportunity Zone program

Gov. Greg Abbott has nominated 605 census tracts across Texas to benefit from capital gains tax abatement incentives designed to encourage development through the federal Opportunity Zone (OZ) program. 

The Office of the Governor recently published a map outlining all tracts nominated to participate in the OZ 2.0 program. The duration of approved OZs will last 10 years, starting on Jan. 1. The Department of Housing and Urban Development (HUD) anticipates selecting around 6,500 census tracts across the nation. 

The initial 1.0 version of the program was launched in 2017 and planned to end after a decade. Conceptually, the OZ program encourages investment and development activity in economically distressed regions and low-income communities across the nation. 

Passage of the so-called “Big Beautiful Bill” solidified the program as a permanent federal fixture. While the original program was intended as a one-time designation for approved tracts, states will have the opportunity to nominate new designations every 10 years going forward. The first round of designations for the revamped program is expected to be announced Nov. 28. 

While the majority of Texas nominations are in rural areas, Gov. Abbott submitted major tracts for urban metropolitan areas surrounding Austin, Dallas-Fort Worth, San Antonio and Houston. 

Austin-area designations include: 

• Travis County – 12 nominated census tracts. 
• Williamson County – six nominated census tracts. 
• Hays County – six nominated census tracts. 
• Caldwell County – six nominated census tracts. 
• Bastrop County – four nominated census tracts. 

Dallas-Fort Worth-area designations include: 

• Dallas County – 60 nominated census tracts. 
• Tarrant County – 20 nominated census tracts. 
• Denton County – seven nominated census tracts. 
• Hunt County – five nominated census tracts.
• Collin County – three nominated census tracts. 
• Johnson County – three nominated census tracts. 
• Kaufman County – two nominated census tracts. 
• Ellis County – one nominated census tract. 

Houston-area designations include: 

• Harris County – 58 nominated census tracts. 
• Galveston County – 17 nominated census tracts. 
• Fort Bend County – six nominated census tracts. 
• Waller County – three nominated census tracts. 
• Brazoria County – two nominated census tracts. 

San Antonio-area designations include: 

• Bexar County – 34 nominated census tracts. 
• Atascosa County – two nominated census tracts. 
• Guadalupe County – two nominated census tracts. 
• Wilson County – one nominated census tract. 

The selected areas include a number of prominent sites ripe for development, particularly city downtown spaces, manufacturing centers and military bases. Austin included a swathe of land in Dog’s Head, which recently received approval for a new tax increment reinvestment zone (TIRZ) expected to yield $5.6 billion in infrastructure investments over the next 35 years. 

The success of the first version of the program was proof that these incentives work, directing roughly $75 billion in capital gains to OZs between 2017 and 2024. The results culminated in its successor’s adoption as a permanent federal program, proving that offering special tax status to projects in these zones directly correlates to more economic opportunities. 

For OZ 2.0, governors can nominate up to 25 percent of eligible census tracts as part of the program. While states have already submitted their nominations for the program’s inaugural round, they will be able to place new nominations once the current OZs expire in 10 years’ time. To be eligible, tracts must have a median family income (MFI) less that 70 percent of state or metro MFI. Alternatively, they must have a poverty rate greater than or equal to 20 percent and MFI less than or equal to 125 percent of state or metro MFI. 

The program includes a standard five-year deferral plus 10 percent basis step-up for all investors. As part of the program, investors are allowed to defer percentages of their taxes based on prior gains. If those investments are located in OZs and held for five years, the government will eliminate 10 percent of taxes on gains from investments. Holding the investments for seven years increases that amount by another 5 percent. 

Among the notable changes between OZ 1.0 and 2.0 include the removal of the Contiguous Tract Rule, which allowed designation of tracts next or adjacent to qualifying tracts. The government also adjusted the criteria required to receive Qualified Rural Opportunity Fund investments from 100 percent substantial improvement needed to 50 percent for OZs composed entirely of a rural area. This means, rather than doubling the investor’s basis in improvements for properties at acquisition to qualify as an OZ, developers only need to add an additional 50 percent in improvements. 

The federal government has also improved benefits for rural areas by offering a 30 percent step-up in basis after 10 years, building on the reduced substantial improvement threshold. Going forward, OZ 2.0 will include which tracts are OZ rural areas. These are defined as any area outside of a municipality that has a population greater than 50,000 and any urbanized area contiguous and adjacent to a city or town. 

The Texas Economic Development and Tourism (EDT) Office sourced key information from eligible economic development organizations and county judges to determine census tract selection. These entities submitted eligible tracts based on the following criteria: 

• Eligibility: Communities should only nominate tracts that clearly meet federal eligibility. 
• Local support: Strong consideration will be given for those tracts where the local community will offer support through incentives, rebates and agreements. 
• Project viability: Communities should prioritize sites where private capital can realistically deploy in 24-48 months and where investments drive inclusive growth in the community, such as affordable housing commitments, anti-displacement tools and workforce initiatives. 
• Geographic balance: EDT will ensure representation across regions of Texas, leverage rural incentives without selecting unworkable tracts and provide an additional incentive for tracts which have been affected by a declared disaster over the last three years. 

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