The tax you deferred when you invested in qualified opportunity zones is due soon. Do you have cash for your tax bill?
The tax you deferred when you invested in qualified opportunity zones is due soon. Do you have cash for your tax bill?
How Much is the Tax
The deferral period ends - and the deferred gain is recognized - on December 31, 2026, for every existing qualified opportunity zone investment. Every investment to that point is under the original rules, and the original deferral ends on that date - even if the investor receives no distribution.
How much tax? The gain is the lower of the remaining deferred gain and the amount that the investor would recognize if they sold their investment in the QOF at fair market value. If you invested by 2021, you also have a 10% or 15% basis adjustment. This means that you may recognize much LESS gain than you originally deferred.
If the investment has not performed well, is not yet in service or has not yet been depreciated, the gain an investor will recognize may be substantially less than the deferred gain. For example, if an investor invested $500,000 in an opportunity zone development deal in 2025 that is still under construction as of December 31, 2026, the value of the investment - the LLC interests in a third-party fund that intends to hold property for at least 10 years - would be subject to a discount for lack of control and lack of marketability, proving a 25% discount or more.
A low equity value does not, by itself, establish a low tax bill (especially if property is substantially depreciated). Check the tax records and get an appraisal. A valuation discount is not automatic.
Planning for the Tax
Next, determine which offsets are actually usable in 2026. Capital-loss carryforwards and appropriately realized capital losses may help. The deferred gain retains its original tax attributes; years in an OZ fund do not turn a short-term gain into a long-term gain. Other deductions have their own limitations.
Then plan the cash. Compare outside reserves, borrowing and a possible fund distribution. Model the tax consequences before deciding where the money will come from. Investors planning for refinances to cover their 2026 tax bill were not planning on interest rates starting at 7%.
December 31 - this year - is the inclusion date when you pay the price. Review estimated-payment requirements and withholding separately. The mandatory inclusion cannot simply be deferred again into another OZ investment.
Start the conversation now: what is the value? Do you qualify for a basis adjustment? What can you use to offset the gain and pay the tax? Take steps now to get your 2026 tax bill under control. Then enjoy your tax-free sale after you pass the 10-year mark.
What is Next?
Any investment made starting in 2027 is under the new rules - 5-year deferral in newly designated zones. I will be writing about the new rules as we get closer to the publication of my new opportunity zone book.
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