Invested in a Qualified Opportunity Zone Fund?

Question

It's crazy to think we are already coming up on 10 years since Qualified Opportunity Zones were first introduced. Unfortunately, the tax liability on your deferred gain is coming due as of December 31, 2026. That means if you invested gains into QOZs in prior years that gain will need to be recognized on your 2026 tax return.

If you recall one of the primary benefits of investing gain into a QOZ was a 10% reduction of the deferred gain if you held it for 5 years. If you held it for 7 years the reduction is increased to 15%. Now here is the kicker: the gain recognition is the LESSER of fair market value or the deferred gain. This means that you need to get the FMV of your investment as of 12/31/2026.

Also, don't forget about state taxes. States can conform to federal tax law or not. Each state needs to be evaluated to determine your potential tax risk. For example, Arizona allows a 25% exclusion on capital gains. Does this extend to the recognized gain on the QOZ in addition to the 10/15% reduction or is it 25% off the deferred gain? These are questions your tax advisor should be answering for you.

What other concerns do you have about the upcoming tax bill?

Dominick Austria · Answer

This is a great point. From a practical standpoint, I would expect very few funds to issue distributions to pay for the tax hit. This might be an even greater incentive to sell stocks that aren't expected to rebound to minimize the tax burden.

Diana Khan · Answer

@Dominick Austria, one thing I would add from the legal and planning side is liquidity. I’ve seen investors pay close attention to the tax benefit when they go into an investment, but not spend as much time thinking about where the cash will come from when the tax eventually becomes due.

For anyone still holding a QOZ investment, I would be reviewing the fund documents now to understand distribution rights, redemption limits, transfer restrictions, and whether there is any expected cash coming out of the investment before the tax bill hits. I would also make sure the ownership of the investment still fits the investor’s estate and business plan, especially if it has been sitting inside the same entity or ownership structure for years.

I’d be glad to stay connected, @Dominick Austria. This is a good reminder that the tax calculation is only one part of the planning. Making sure the investor is actually prepared to pay it matters too.

Invested in a Qualified Opportunity Zone Fund?

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