Legal Developers

Opportunity Zone Planning For 2026 Deferred Gains

The Opportunity Zone program is entering a 2026 year-end transition as the original Opportunity Zone framework shifts to the post-2026 program, complete with new 10-year designation cycles beginning on January 1, 2027. For legacy Qualified Opportunity Fund (“QOF”) investments, deferred gain generally must be included in income in the tax year ending on or including December 31, 2026, unless an earlier inclusion event (including a sale or exchange) occurs. In practical terms, that can mean a cash tax obligation that is due with a taxpayer’s 2026 returns filed in 2027, even if the investment remains illiquid. The amount included is generally the excess of (i) the lesser of the deferred gain or the fair market value (“FMV”) of the QOF investment (measured at the “inclusion” date) over (ii) the investor’s basis.

First priority for QOF investors: quantify exposure to the 2026 tax bill

The most immediate planning task is understanding how much gain will become taxable and when cash will be required. A practical work plan approaching year-end 2026 should include the following:

• Model federal and state exposure: State conformity and residency changes can materially affect the ultimate tax cost at year-end 2026.
• Plan for liquidity: Evaluate whether the investor (or any pass-through vehicle) has cash reserves, distribution capacity, refinancing proceeds, or other sources to satisfy tax obligations.
• Tie modeling to valuation: Because the inclusion amount can turn on FMV, projections should be reconciled with a defensible and reasonable valuation approach well in advance of year-end.

NOTE: Pass-through caveat. Investors holding QOF interests through partnerships, S corporations, or other pass-through entities should model the inclusion event with additional care. While the general statutory construct is based on the “lesser of deferred gain or FMV, reduced by basis,” pass-through rules can add additional complexity.

Appraisal considerations

Many investors hold minority and/or illiquid QOF interests that may be subject to transfer restrictions and limited governance rights. For example, the FMV for a fund interest can differ materially from a share of the underlying asset value, particularly when the interest is non-controlling or lacks a readily identifiable or accessible market. For year-end 2026, investors and advisers should consider whether to obtain independent valuation support, which should include, among other items, analysis of lack-of-control considerations for non-controlling positions, lack-of-marketability and transfer-restriction impacts, and an underlying-asset risk analysis.

Transition limits on legacy deferral

The Opportunity Zone program has been made permanent with recurring 10-year designation cycles beginning January 1, 2027. However, legacy deferred gains from the original tax regime generally cannot be “re-deferred” into the new post 2026 program. This makes liquidity planning more important because a QOZ rollover will not solve the ultimate 2026 tax bill.

The 10-year benefit remains after the 2026 inclusion

Although the 2026 inclusion event ends the original deferral period for legacy gains, the 10-year exclusion mechanism is still valuable. For qualifying investments held for at least 10 years, IRC 1400Z-2 permits an election to step up the basis to FMV on a sale or exchange, which generally eliminates capital gain on appreciation. That benefit does not eliminate the original deferred gain recognized in 2026; rather, it addresses appreciation after the original QOF investment.

Post-2026 permanent program

For QOF investments made on or after January 1, 2027, deferred gain is generally recognized at the earlier of a disposition or five years after the date of investment. The post-2026 regime also provides for a 10% basis step-up after five years for many qualifying QOF investments and a 30% basis step-up for certain Qualified Rural Opportunity Fund investments held for five years. The 10-year FMV basis election concept continues, subject to a new 30-year cap.

How Obermayer can help

We work with investors, fund sponsors, and advisers to navigate the intersection of tax timing, valuation, and transaction planning, including:

• Quantifying deferred gain, basis, and 2026 inclusion exposure for legacy QOF investments
• Documentation support for tax reporting positions tied to the December 31, 2026 valuation date
• Restructuring analysis, including secondary transfers, redemptions, recapitalizations, and refinancing scenarios
• Evaluation of post 2026 QOZ opportunities, including Qualified Rural Opportunity Fund strategies

The information contained in this publication should not be construed as legal advice, is not a substitute for legal counsel, and should not be relied on as such. For legal advice or answers to specific questions, please contact one of our attorneys.