HR 2292119th CongressIn Committee

Economic Opportunity for Distressed Communities Act

Introduced: Mar 24, 2025

Standard Summary

Comprehensive overview in 1-2 paragraphs

The Economic Opportunity for Distressed Communities Act would create a new set of tax incentives to encourage private investment in distressed areas, specifically brownfield sites and locations on the EPA’s National Priorities List (NPL). The core idea is to let taxpayers defer and partially exclude capital gains when they invest those gains in a newly defined Qualified Distressed Opportunity Fund (QDOF) that uses the money to acquire and improve qualified distressed opportunity zone property. If the investment is held for extended periods (notably 10 years), the taxpayer can receive substantial basis adjustments that may eliminate tax on subsequent gains from the investment. The program includes stringent requirements for funds to qualify (the 90% asset test), definitions of what counts as distressed property, rules for how gains are recognized and taxed over time, and penalties for funds that don’t meet the standards. The measure is framed as a way to spur cleanup and redevelopment of brownfields and other high-priority sites, with a sunset on new elections after December 31, 2033.

Key Points

1180-day investment window and partial gain exclusion: When a taxpayer sells or exchanges property to an unrelated person, they may elect to exclude from current income the portion of gain up to the amount invested in a QDOF within the 180 days after sale. The excluded gain is later included in income under the law’s deferral rules.
2Deferral and eventual taxation: The gain that was excluded is taxed in the year that the related QDOF investment is sold or exchanged, or by December 31, 2033—the earlier of those dates. The amount includible is the excess of (i) the smaller of the gain excluded or the investment’s fair market value (as of the relevant date) over (ii) the investor’s basis in the investment.
3Basis rules and credits for long holds: The taxpayer’s basis in QDOF property starts at zero (with certain increases) but increases if gain is recognized due to the election. If the investment is held at least 5 years, basis increases by 10% of the deferred gain; at 7 years, an additional 5% (total 15%); after 10 years, the basis equals the fair market value of the investment on the sale date, effectively becoming a full basis step-up for that investment.
4Special 10-year rule (full basis step-up): For investments held at least 10 years with an election, the basis of the investment equals its fair market value when sold or exchanged, which can significantly reduce or eliminate future gains taxes on that investment.
5Qualified Distressed Opportunity Fund (QDOF) criteria: A QDOF must be organized as a corporation or partnership and hold at least 90% of its assets in qualified distressed opportunity zone property (measured on two points in the year). It must invest in property that qualifies as brownfield sites or certain EPA NPL facilities.
6What counts as distressed opportunity zone property: Includes qualified distressed opportunity zone stock, qualified distressed opportunity zone partnership interests, or qualified distressed opportunity zone business property. The stock and partnership interests must be acquired after December 31, 2025, directly in exchange for cash, and the issuer/partnership must be a qualifying distressed zone business during the fund’s holding period.
7Qualifying distressed zone property and business: A “qualified distressed opportunity zone” is either a brownfield site or an EPA-listed NPL facility. A “qualified distressed opportunity zone business” is a trade or business meeting specific tests, including that substantially all tangible property is qualified property and that the business complies with particular internal provisions and is not described in another specified IRS code section.
8Penalties for fund noncompliance: If a QDOF fails to meet the 90% asset requirement, it must pay a monthly penalty equal to the underpayment rate times the shortfall (the amount by which 90% of assets is not met). The penalty is shared among partners in a partnership. A reasonable-cause exception exists to avoid penalties.
9Regulations and coordination: The Secretary would issue regulations, including fund certification rules, reinvestment timelines, and anti-abuse measures.
10Effective date and sunset: The new rules apply to amounts invested after enactment. New elections under the program cannot be made after December 31, 2033.

Impact Areas

Primary group/area affected:- Investors selling appreciated assets who opt into the QDOF program to defer and potentially reduce capital gains taxes.- Distressed communities containing brownfield sites and EPA NPL facilities, which could see increased investment for cleanup, redevelopment, and job creation.Secondary group/area affected:- Qualified distressed opportunity funds and fund managers who must meet the 90% asset requirement and handle the certification, reporting, and reinvestment rules.- Tax professionals and corporate/partnership taxpayers who advise on capital gains planning and compliance with the new rules.Additional impacts:- Real estate development and environmental remediation activity could rise in areas classified as distressed opportunity zones.- There could be broader fiscal and environmental policy implications, including potential interactions with existing opportunity zone programs and related tax incentives.

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