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

.02 Substantial Improvement of Prop- erty 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 Prop- erty 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.

2 See “Urban Area Criteria for the 2010 Census,” 76 FR 53030 (August 24, 2011).

3 See “Urban Area Criteria for the 2020 Census-Final Criteria,” 87 FR 16706 (March 24, 2022).

4 Id. at 16715.

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such property at the beginning of the 30-month period described in § 1400Z2(d)(2)(D)(ii).