When does the qualified opportunity zone capital gains deferral end?

Deferred capital gains invested in Qualified Opportunity Zone funds must be recognized no later than December 31, 2026, regardless of whether the investor has sold their QOZ investment. This deadline applies to all original QOZ investments and requires investors to plan for the tax liability on previously deferred gains.

Can you still get the 10-year capital gains exclusion from qualified opportunity zones?

Yes. Investors who hold their Qualified Opportunity Fund investments for at least ten years can exclude from income any appreciation in the QOZ investment itself. This permanent exclusion of post-investment gain remains the most valuable benefit of the program, even as the original deferral period ends.

The Qualified Opportunity Zone Program: Where Things Stand in 2024 | Lynch Law

The Qualified Opportunity Zone program, enacted as part of the Tax Cuts and Jobs Act of 2017, offered investors a powerful incentive: defer capital gains by investing them in designated low-income communities, and potentially reduce or eliminate the tax on those gains. As the program enters its final phase under the original statutory framework, investors and fund managers face critical decisions about the recognition of deferred gains and the disposition of QOZ investments.^[1]

Where Things Stand

The QOZ program provides three potential tax benefits for investors who invest eligible capital gains in a Qualified Opportunity Fund within 180 days of realizing the gain. First, the gain is deferred until the earlier of the date the QOF investment is sold or exchanged, or December 31, 2026. Second, if the QOF investment is held for at least five years, the investor receives a 10 percent basis step-up in the deferred gain (reducing the taxable gain by 10 percent). The seven-year, 15 percent step-up is no longer available for new investments because the December 31, 2026, deadline makes it impossible to hold a new investment for seven years before the deferral period ends. Third, if the QOF investment is held for at least ten years, any appreciation in the QOF investment itself (beyond the original deferred gain) is permanently excluded from income.^[2]

The Approaching Deferral Deadline

The most immediate issue for QOZ investors is the December 31, 2026, deferral deadline. On that date, all deferred gains must be recognized — regardless of whether the investor has sold or exchanged the QOF investment. This means investors will owe tax on their original deferred gains in their 2026 tax returns, which creates a cash flow planning challenge: the investor may owe a significant tax without having received any cash from the investment.

For investors who made large QOZ investments, the 2026 tax bill could be substantial. A taxpayer who deferred a $2 million capital gain by investing in a QOF will owe tax on approximately $1.8 million of gain (after the 10 percent basis step-up for a five-year hold) at the applicable capital gains rate. At a combined federal and state rate of approximately 25 percent, the tax bill would be approximately $450,000.

The Ten-Year Exclusion: Still the Prize

Despite the approaching deferral deadline, the most valuable benefit of the QOZ program — the permanent exclusion of appreciation on the QOF investment after ten years — remains intact. Investors who made their QOF investments in 2018 or 2019 are approaching the ten-year holding period, and those who hold their investments until 2028 or 2029 will be able to sell their QOF interests and exclude all of the post-investment appreciation from income.^[3]

The distinction is important: the deferral benefit (which ends in 2026) and the exclusion benefit (which requires a ten-year hold) are separate provisions. An investor can owe tax on the original deferred gain in 2026 while still planning to hold the QOF investment for the full ten years to capture the exclusion on appreciation.

Assessment of the Program

The QOZ program has been a mixed success. On the positive side, it has directed tens of billions of dollars in investment capital to communities that were previously underserved, funding real estate development, small business growth, and infrastructure improvements. On the negative side, critics have argued that much of the investment has gone to communities that were already gentrifying, that the program's benefits have flowed disproportionately to wealthy investors, and that the reporting and compliance requirements have been insufficient to ensure that the investments actually benefit the targeted communities.

Planning for 2025 and Beyond

Investors with existing QOF investments should take several steps. First, model the 2026 tax liability from the deferred gain recognition and ensure adequate liquidity to pay it. Second, evaluate whether the QOF investment is performing well enough to justify holding it for the full ten years to capture the exclusion benefit. Third, review the QOF's compliance with the substantial improvement and qualified opportunity zone business property requirements, as a failure of compliance could disqualify the investment. And fourth, monitor legislative developments — there have been proposals to extend the QOZ program, modify the deferral deadline, and designate new zones, any of which could affect the planning calculus.^[4]

References

^[1] IRC § 1400Z-2 (qualified opportunity zone program, enacted by TCJA § 13823).
^[2] IRC § 1400Z-2(b)(2)(B) (deferral election and inclusion events); IRC § 1400Z-2(c) (10-year exclusion of post-investment appreciation).
^[3] IRC § 1400Z-2(c) (providing that the basis of the QOF investment is adjusted to fair market value on the date of sale if held for at least 10 years).
^[4] Treas. Reg. §§ 1.1400Z2(a)-1 through 1.1400Z2(f)-1 (final regulations on QOZ program compliance requirements).