In 2017, Qualified Opportunity Zones (QOZs) were created to encourage additional investment in certain census tracts nominated by state governors. Funds tied to QOZs were given very specific rules including location, tax inclusion timing, and allowed investments. They also had a hard deadline for how long any gains rolled into a Qualified Opportunity Fund (QOF) could be deferred on your income tax return: December 31, 2026.

If you deferred gains in one of these funds, any you haven’t yet recognized will be treated as income on your 2026 return—regardless of whether your fund has distributed a dollar. Now is the time to prepare for the tax bill coming due.

The reasons you invested in a Qualified Opportunity Fund

Under the original QOZ program, investors receive a 10% step-up in basis after five years and an additional 5% step-up in basis after seven years, along with a full exclusion of gains on QOF investments held for at least 10 years. This, along with the full capital gain deferral, created a powerful incentive to invest in QOZs. Investments were required to be made in 2019 (for the full 15% benefit) or 2021 (for 10%) to qualify for the respective basis step-up.

If an investor holds the QOF investment for more than 10 years, the basis is stepped up to fair market value at sale, eliminating tax on all appreciation in the QOF investment itself.

All of these benefits, however, apply to the QOF itself. An originally deferred gain used to fund the QOF is handled separately, as discussed below.

Transfers and inclusion events—why you may not owe additional tax on your 2026 return

An “inclusion event” is any transaction that reduces or terminates the investor’s equity interest in the QOF. This, in turn, accelerates recognition of the deferred gain before the December 31, 2026, deadline. Common inclusion events include:

  • Selling or exchanging the QOF interest
  • Gifting the interest (generally an inclusion event, with an exception for transfers at death)
  • Certain corporate or partnership restructurings that reduce the investor’s interest
  • Distributions from the QOF exceeding the investor’s basis (which is often $0 or near it)

If you invested in a QOF, previously had an inclusion event, and included the deferred gain in your income for that year, then no additional tax will be due December 31, 2026.

A transfer to the investor’s estate at death and certain transfers between spouses or transfer incident to divorce generally do not trigger an inclusion event. Death is not a basis step-up event for QOZ holdings—the deferred gain is income in respect of a decedent, and the heir does not receive a stepped-up basis on that portion. Instead, they inherit the built-in tax liability, including the December 31, 2026, inclusion deadline.

What happens on December 31, 2026

The end of 2026 is the backstop built into the original QOZ law. If you deferred a gain into a QOF before 2027, your inclusion event is December 31, 2026. Recent IRS guidance (Notice 2026-40) confirmed this: For gains realized and invested in a QOF on or before December 31, 2026, any deferred gain must be included in income no later than the tax year that includes December 31, 2026. Critically, the deemed-included gain on December 31, 2026, cannot be treated as a newly eligible gain for a second deferral election and you can’t re-defer it into the new QOF 2.0 created by the One Big Beautiful Bill Act.

Note that this is a deemed inclusion, not an actual sale. The investor keeps the QOF interest and can still use the 10-year fair market value step-up election on a later, real disposition.

Selling at a loss if fund values have declined—the FMV cap

This is the most important planning nuance. The amount recognized on December 31, 2026, is not automatically the full deferred gain under §1400Z-2(b) nor the net asset value reported by the fund—it’s the lesser of the originally deferred gain, or the fair market value (FMV) of the QOF interest on December 31, 2026.

That means that if the fund’s value has declined since the original investment, this may significantly reduce the amount of gain recognized, and any excess of the deferred gain over the FMV is generally eliminated permanently with no recapture mechanism.

For example, if an investor deferred $1 million of gain into a QOF and the fund is now worth $600,000, only $600,000 of gain is recognized at year-end—the other $400,000 simply disappears from a tax standpoint. This makes an appraisal exercise genuinely worth doing before year-end. Additionally, many funds may qualify for valuation discounts such as lack of marketability, lack of control, and completion risk.

Practical 2026 tax planning knowing the inclusion is coming

Unlike many tax decisions that are contingent on choosing to sell, this is a known, dated event. It’s a forced-gain recognition that can be planned for. Here are some strategies to consider.

Loss harvesting

Since the QOF gain recognition is essentially guaranteed for anyone still holding a pre-2027 QOF interest, 2026 is a natural year to harvest capital losses elsewhere in your portfolio. When a capital gain is being recognized, capital losses (short- or long-term, subject to the usual netting rules) offset it dollar for dollar.

Charitable giving

This is also a good year to consider accelerating charitable deductions or increasing itemized deductions, including:

  • Donor-advised fund (DAF) contributions of appreciated stock, which avoid a gain on the donated shares themselves and can generate a deduction in the same year as the QOZ inclusion;
  • Charitable remainder trusts, which can create a meaningful deduction if there’s a larger liquidity event happening in the same year; and
  • Bunching multiple years of giving into 2026 to clear the standard deduction threshold and maximize the itemized benefit against the QOZ income recognition. This strategy can be used in combination with a DAF, allowing gifts to still be made over multiple years while the full deduction is allocated to this year.

Liquidity planning

Investors typically have little or no tax basis in their QOF interests prior to gain recognition. As a result, even modest distributions can trigger unintended taxable events. More importantly, this is a phantom income event if the investor hasn’t sold anything. The tax bill arrives without any accompanying distribution, making cash-flow and estimated tax planning critical. Potential options include the QOF making a distribution to cover the liability (carefully, so it doesn’t itself become a separate inclusion problem before year-end) or the investor needs to tap other sources of liquidity. Q4 2026 estimated payments should reflect the taxes, rather than a taxpayer being surprised in April 2027.

State conformity

Not every state automatically follows the federal QOF deferral and exclusion rules—some states required the capital gain tax to be paid previously, so confirming state treatment before year-end matters as much as the federal side.

Get a valuation

Given the FMV cap mentioned above, documenting FMV as of December 31, 2026, if the fund’s value has dropped is worth doing proactively, as it can directly cap the taxable gain.

Confusion with the One Big Beautiful Bill Act’s new program

The One Big Beautiful Bill Act made QOZs permanent and established a rolling five-year deferral. However, the new rules apply only to investments made after 2026. It doesn’t reopen or extend the clock on investments already in a pre-2027 QOF. If you want a new QOZ deferral going forward, that requires a new gain and a new QOF investment in a newly designated zone starting in 2027—it’s a separate decision from what occurs with the existing investment this December.

Given the year-end deadline, valuation dependency (NAV vs. FMV), and interplay with tax-loss harvesting and charitable timing, it’s important to discuss your personal situation with your tax advisor well before Q4 rather than in tax-return season.

For assistance with tax planning around your QOZ investments, reach out to your Cerity Partners advisor or request an introduction today.

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