Mark your calendar: Opportunity zone tax deferrals end in 2026
Qualified Opportunity Zones (QOZ), introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017, have encouraged investment in economically distressed communities and allowed investors to defer and reduce certain capital gains taxes. However, as of Dec. 31, 2026, the deferral period is over for these original gains, and taxpayers can face significant tax bills without the necessary cash to satisfy the obligation. There are many things that taxpayers can do throughout this year to limit the cash outflow at the end of the year, including:
- Harvesting and generating other capital losses to offset gains.
- Utilizing charitable contributions to reduce the overall tax due.
- Determining the proper value of QOZ investments that have decreased in value.
While the One Big Beautiful Bill Act (OBBBA) introduced the second tranche of QOZ investments to begin Jan. 1, 2027, this article primarily focuses on the end of the first program and the gains that are coming due this year.
One of the key tax benefits of QOZs will expire soon
The TCJA first introduced QOZs in 2017 offering significant tax benefits to investors to defer and reduce capital gains recognition. Investors who reinvested eligible capital gains into a QOZ or QOF within 180 days of the disposition that produced the capital gains would not have to recognize those gains until the earlier of: (1) the date the investment is sold or exchanged or (2) Dec. 31, 2026. Those investors who took advantage of this QOZ deferral period may no longer be able to defer the inevitable at the end of 2026.
When planning for liquidity around this recognition event, it is important to understand how much gain is going to be recognized, as well as how best to prepare.
The amount of recognizable gain can be decreased with adjustments to basis that are available.
- If the investor held the QOZ investment for at least five years they receive a basis increase equal to 10% of the deferred gain.
- If the investor held the investment for at least seven years, they receive an additional 5% increase to their basis in the QOZ for a total of 15% of the deferred gain.
- The five and seven year investment holding periods must be met as of Dec. 31, 2026 to receive the increases to basis.
Planning strategies for the inevitable
Preparing now by implementing tax saving strategies will ensure investors have the liquidity to fund any forthcoming capital gains tax liability.
Harvesting capital losses throughout 2026 and exploring investment strategies that may generate additional losses in the short term can help position investors more favorably if liquidity is a concern.
- Selling other loss positions throughout the year may help to maximize the losses available to offset end-of-year gains rather than harvesting these losses once a year.
- Tax-aware long/short strategies can create a broad, diversified portfolio with the intent of capturing up-front losses and further deferring gains.
- Abandoning partnership interests with minimal or no value can trigger losses on those investments, which may release suspended passive losses.
Potential considerations
- Assess the performance of the QOZ or QOF investment and weigh the benefits of continued holding versus disposing of the investment. If the QOZ investment is held for at least 10 years, any appreciation on the sale of the QOZ investment itself can be completely excluded from gross income.
- Many transfers, such as gifting, transferring the investment to a C corporation or an S corporation, can trigger the gain in the QOZ investment early.2 However, gifting the interest to a grantor trust will avoid triggering the recognition of any gain until Dec. 31, 2026.
- For those looking to limit gain through a lower valuation in 2026, realize that valuation is more an art than a science. The IRS often challenges valuations, and depending upon the tax at risk, this may not be a time to save professional services fees.
- Several states did not conform to the QOZ rules back in 2018; therefore, gain may only need to be recognized for federal purposes and not at the state level.
- Work with your tax advisors and financial planners to ensure tax compliance and optimize your strategy based on evolving IRS guidance and personal financial circumstances.
The takeaway: Deferred capital gains are coming due soon, but planning now can lessen the impact
Eligible capital gains that were deferred by reinvestment into QOZ cannot escape tax liability forever. Absent an earlier disposition, Dec. 31, 2026, will trigger the recognition of those deferred capital gains. Preparing for liquidity and strategizing now with your financial planners and tax advisors can decrease the strain on your bank account when it comes time to pay your 2026 estimated tax payments and file your 2026 tax returns. While there may still be outstanding questions surrounding the Dec. 31, 2026 recognition date, it is imperative to plan and strategize now.
1 Section 1400Z-2(b)(2)(A)
2 Reg. section 1.1400Z2(b)-1(c)(4)(ii)
Related insights
- /insights/services/business-tax/obbba-tax-opportunity-zones
- /insights/services/private-client/individual-tax-planning-guide