The Tax Cuts and Jobs Act of 2017 (TCJA) introduced the Qualified Opportunity Zone (QOZ) program to spur long-term investments in economically distressed communities. Investors who participate can unlock significant tax benefits, but one of the most important incentives, the capital gain deferral, will sunset on December 31, 2026, unless extended by Congress.

For those that are invested, or are thinking about investing, here is what you need to know.

QOZ Overview: A Refresher

There are over 8,700 QOZs across the U.S., according to the Department of Housing and Urban Development, where investments in Qualified Opportunity Funds (QOFs) can yield tax advantages. To qualify, investors must:

• Reinvest eligible capital gains into a QOF within 180 days of recognition;
• Receive an equity interest in the fund (not a debt instrument); and
• Ensure the QOF holds 90% or more of its assets in QOZ property including real estate, businesses or equipment within the zone.

Eligible gains include:

• Short- and long-term capital gains, and
• Section 1231 gains (from depreciable property used in a trade or business).

Related Reads: The Extended COVID-19 Qualified Opportunity Zone Relief Deadlines are Coming Due

Tax Planning Considerations

Capital Gain Deferral

Investors can defer recognition of eligible gains until the earlier of:

1. Dec. 31, 2026; or
2. An inclusion event (e.g., selling or transferring QOF interest, or the fund liquidating).

The amount recognized will depend on the fair market value of the QOF investment and its adjusted basis at the time of inclusion. Notably, deferred gains retain their original character: short-term or long-term.

Stepped-Up Basis (Legacy Incentives)

Investors who held QOF investments for at least 5 or 7 years before 2026 could reduce their deferred gain via an increase in basis of 10% or 15%, respectively. Unfortunately, the window to qualify for these step-ups has closed.

10-Year Exclusion

Investors who hold QOF interests for at least 10 years can elect to increase basis to FMV upon sale or exchange, permanently excluding post-investment appreciation, including amounts subject to 25% depreciation recapture.

This benefit applies through Dec. 31, 2047, provided the QOF remains active.

Action Items Before the 2026 Deadline

For clients with deferred gains in QOFs who have not had an inclusion event yet and do not expect one before the end of 2026:

• Prepare for tax liability in 2027: the deferred gains will be includible on the 2026 tax return;
• Ensure liquidity to cover this liability, particularly for illiquid investments; and
• Reconfirm the character of the original gain for proper reporting (e.g., long-term or short-term gains taxed at ordinary rates).

Investors who are still eligible to reinvest 2024–2026 capital gains should evaluate the value of the deferral and the 10-year exclusion, even without the 10%-15% stepped-up basis incentive.

Potential Extension: What’s on the Table

Several pending bills in Congress could extend or refine the QOZ program. While nothing is guaranteed, both parties have shown interest in continuing and improving the regime.

Opportunity Zones Transparency Extension and Improvement Act (H.R. 5761)

• Extends deferral eligibility to Dec. 31, 2028;
• Sunset QOZs in non-impoverished areas;
• Restores and expands reporting requirements;
• Allows creation of “fund of funds” structures;
• Provides technical assistance grants to underserved areas; and
• Adds select brownfield sites as eligible zones.

Rural Opportunity Zone and Investment Act (H.R. 3906)

• Introduces a new class of rural opportunity zones (persistent poverty areas);
• Offers capital gain deferral through Dec. 31, 2032; and
• Mirrors QOF holding period benefits (5-, 7-, and 10-year structure).

Final Thought for Advisors and Investors

Whether advising clients or looking for a smart way to reinvest, it’s crucial to account for the approaching 2026 deferral deadline, especially for investors with large capital gains still eligible for reinvestment.

While future legislation may enhance the program, the 10-year exclusion remains firmly in place, offering long-term, potentially tax-free growth for investors who act soon.

Now is the time to:

• Review existing QOF investments;
• Plan for 2026 gain recognition; and
• Identify new gains eligible for deferral.

Patient investors still have a strong incentive to pursue QOZ opportunities but the window for deferral is closing.

If you have any questions or concerns, please contact your ORBA Advisor or Tyler Adams at [email protected] or (312) 670-7444 to review your personal tax situation. Sign up here to receive our blogs, newsletters and Client Alerts.