A wave of deferred tax bills is approaching for investors who put money into Qualified Opportunity Funds, as the deferral period for capital gains taxes comes to an end this December.
At the close of 2024, investors had deferred taxes on $75 billion worth of capital gains through these specialized investment vehicles, according to a new working paper from the Treasury Department’s Office of Tax Analysis. All of those deferred gains will become taxable on December 31, 2026, regardless of when the original investment was made.
Opportunity Zones were created by the Tax Cuts and Jobs Act of 2017 to direct investment into economically distressed communities. The zones are nominated by states and certified by the Treasury Department, and investors can put money into Qualified Opportunity Funds that invest in these designated areas.
As of late 2024, roughly 12,800 Qualified Opportunity Funds existed with approximately 41,000 investors participating. About 85% of those investors are individuals, with the remainder being corporations. The typical individual investor reported adjusted gross income of $738,000 in 2024, according to the Treasury research.
How the Tax Benefits Work
The program offers several tax incentives tied to capital gains. Investors who hold their fund investment for 10 years generally owe no taxes on gains earned within the fund itself. Additionally, investors have been able to defer paying taxes on realized capital gains from other investments that they rolled into these funds.
The timing of the initial investment matters significantly. Investors who got into a Qualified Opportunity Fund by the end of 2019 using realized capital gains can claim a 15% step-up in basis on their deferred gains, meaning only 85% of those gains will be taxed. Those who invested by the end of 2021 receive a 10% step-up. Investors who came in after those deadlines receive only the deferral benefit with no basis reduction.
“Regardless of when from 2018 to present investors have deferred gains, the deferral period will end on Dec. 31, 2026, making all the gains taxable as of that date,” said Jason Watkins, a partner with accounting firm Novogradac & Co. and an Opportunity Zone expert.
Planning for the Tax Hit
Financial advisors are urging investors to prepare for the upcoming liability. “Hopefully they’ve planned for it and realize they’ll owe taxes on these gains,” said Ryan Firth, a certified financial planner and certified public accountant based in Bellaire, Texas. “And hopefully they’ve set aside money to be able to pay the taxes.”
According to Watkins, some funds have provided liquidity to investors through debt-financing or other distributions specifically to cover the tax obligations. However, he expects most investors to remain in their funds despite the tax bill, since the program’s most valuable benefit — tax-free gains after a 10-year holding period — hasn’t yet been realized.
“I expect few investors to cash out to cover taxes as achieving a 10-year hold unlocks the most valuable of the incentives, which is a potential tax-free exit,” Watkins said.
Changes Ahead
The Opportunity Zone program itself has been made permanent through legislation enacted in summer 2025, often referred to as President Donald Trump’s “big beautiful bill.” The law calls for new zones to be designated every 10 years, with the next round of nominations underway and scheduled to take effect January 1, 2027, according to the Economic Innovation Group, the think tank that originated the concept.
Starting in 2027, the program’s structure will change. Rather than benefits varying based on investment timing, all investors will receive a five-year capital gains deferral with a 10% step-up in basis available after that period. Investors focusing on funds in rural areas will receive an enhanced 30% step-up in basis on their originally deferred gains after five years.
“Permanency with both a five-year deferral and a 10% basis step-up available regardless of when investors make their investments provides investors with more certainty,” Watkins said.
Source: www.cnbc.com — https://www.cnbc.com/2026/07/26/opportunity-zone-investors-face-deferred-capital-gains-tax-bill.html
This article is for informational purposes only and does not constitute financial, investment, tax, or legal advice. Do your own research and consult a licensed professional before making financial decisions.
