The tax break that opportunity zone investors banked on years ago is about to expire, and the amount at stake is staggering.A new working paper from the Treasury Department’s Office of Tax Analysis reveals roughly $75 billion in deferred capital gains sitting inside Qualified Opportunity Funds as of late 2024. That money belongs to about 41,000 investors across approximately 12,800 funds. On December 31, 2026, nearly all of it becomes taxable, whether the underlying investment has been sold or not.The Dec. 31 deadline has real consequences for fund investors”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,” Jason Watkins, a partner with accounting firm Novogradac & Co. and an expert in Opportunity Zones, told CNBC.The original program, created by the Tax Cuts and Jobs Act of 2017, allowed investors to roll realized capital gains into Qualified Opportunity Funds within 180 days of the sale that produced those gains. Related: IRS tax liens are raising new alarms for your financesIn return, they received a deferral, with the understanding that gains would come due on the earlier of a fund sale or the end of 2026. That deadline is now fewer than six months away, creating a liquidity problem for investors who never sold their positions. Because the tax applies regardless of whether the investor has received cash from the fund, some participants could face capital gains tax liabilities they lack the funds to cover.Most investors have already lost their basis step-up benefitsInvestors who entered the program early received the most favorable treatment. Those who invested by the end of 2019 and held for at least seven years qualified for a 15% step-up in basis, meaning they will owe taxes on only 85% of the original amount. Investors who got in by the end of 2021 and held for five years received a smaller 10% reduction. Anyone who invested after 2021 received no basis reduction at all, and their full deferred gain will be taxable when the deadline hits.The Treasury data also revealed the profile of a typical fund participant. About 85% are individuals rather than corporations, and the typical individual reported adjusted gross income of $738,000 in 2024, the research indicated.
Most Opportunity Zone investors missed valuable basis step-up tax breaks.Nitat Termmee / Getty Images
Tax advisors outline strategies to reduce the year-end billBecause the gains will come due whether investors are ready or not, tax professionals have outlined several approaches to limit the damage. Andy Swanson, a Tax partner at RSM US, noted that investors can harvest capital losses from other positions throughout 2026 to offset the gains triggered on December 31.Charitable contributions represent another approach that can lower overall tax liability in the recognition year, RSM noted. More Personal Finance:Bessent makes bold case for Trump Accounts to build wealthIRS opens new path to Covid refund claims before deadlineU.S. credit card debt sets troubling recordInvestors with funds that have declined in value may also benefit from obtaining an independent valuation, though the firm warned that the IRS frequently scrutinizes those assessments.For investors who have held their fund position for at least 10 years, a separate benefit remains available. Appreciation on the opportunity zone investment itself can be excluded from income entirely through a fair market value basis election.A revamped opportunity zone program launches in 2027The One Big Beautiful Bill Act, signed into law on July 4, 2025, made the opportunity zone program permanent and introduced new designated zones taking effect on January 1, 2027.Under the updated framework, new investments will carry a fixed five-year deferral period tied to the date of each investment, not a universal deadline. Watkins said the revamped program gives investors greater confidence through consistent, predictable tax benefits.”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.Under the new framework Cherry Bekaert outlined in its analysis of IRS Notice 2026-40, an investor who deploys capital on March 1, 2027, would recognize the deferred gain on March 1, 2032, absent an earlier sale.At that five-year mark, investors will receive a 10% basis step-up on standard investments, or 30% for qualified rural opportunity fund investments, the firm’s advisors explained.Gains triggered on Dec. 31 cannot roll into the new programIRS Notice 2026-40 confirmed that gains recognized on Dec. 31, 2026, under the original deferral deadline are not eligible for re-deferral under the revamped program, Cherry Bekaert’s analysis indicated.However, gains from new asset sales made late in 2026 can be invested into a post-2026 fund, as long as the 180-day investment window has not expired. An investor who sells an asset in September 2026 could invest those proceeds into a new fund in early 2027 and capture the updated benefits. Watkins, the Novogradac partner, has emphasized that the long-term hold remains the most valuable element for investors weighing their options. “The most compelling value of the OZ is the 10-year hold,” Watkins said, explaining that tax-free treatment of appreciation on the investment itself typically outweighs the deferral benefit over time.The five months remaining before December 31 represent a critical planning window for about 41,000 fund participants, and waiting until the final weeks of the year could significantly limit available options, RSM recommended.Related: Fidelity discloses wealth move that triggers hidden IRS tax