Qualified Opportunity Zones: Start Planning for Gain Recognition

The Qualified Opportunity Zone (QOZ) Program, enacted as part of the TCJA, provides taxpayers with tax-enhanced returns on qualified investments made into designated opportunity zones. The program offers several key benefits, including temporary deferral of eligible gains, a step-up in tax basis for certain investments, and the exclusion of taxable gains for investments held for ten years or more. These tax advantages, combined with sound underlying economics, can significantly enhance the overall attractiveness of an investment opportunity.

Importantly, the gains reinvested and deferred under the program are not deferred indefinitely until the investment is sold or liquidated. Rather, the gain deferral represents only a temporary relief of tax liability. All gains deferred into the first QOZ program will be deemed recognized and taxable as of December 31, 2026.

Accordingly, taxpayers with QOZ investments should ensure that these deferred gains are incorporated into their 2026 tax planning and projections. Advisors — including tax preparers, financial planners, and investment professionals — should be fully informed of the deferred gains scheduled for recognition in 2026. To mitigate the tax impact, taxpayers may be able to offset the recognized capital gains with capital losses realized throughout the 2026 calendar year. Proper coordination and timing can be critical for effective tax management.

Three primary tax benefits available for QOZ investors are:

1. The ability to defer the gain until either the investment was sold or a set date (12/31/2026 under the TCJA)
2. A reduction in the amount of capital gains income from the original sale, provided that the new investment is held for a set period.
3. Permanent exclusion of gain from appreciation on the new investment if held for a set period of time.

The deferral rules for opportunity zones provide opportunities that 1031 exchanges do not. After enactment of the TCJA, only real property is eligible for section 1031 treatment. By contrast, opportunity zones allow deferral of any form of capital gain income, including section 1231 (business asset) sales treated as capital gain income and capital gain from stock sales. Additionally, in the case of a 1031 exchange, all proceeds must be reinvested in the new property, including the return of the original investment basis. In an opportunity zone investment, a taxpayer can simply take the amount of cash equal to the realized capital gain and invest it in the QOZ. Another contrast to 1031 exchanges is that the election to defer the investment in the QOZ is made by the individual members for passthrough capital gains. Notably, the opportunity zone benefits are only available for investments made with capital gain funds. Any additional cash invested is ineligible for the stepped-up basis on the new investment.

It is also important to note that not all states conform to the Federal QOZ provisions. Some states decoupled from the federal rules in later years, meaning that certain taxpayers may have already paid state tax on their deferred gains. In some cases, the same qualified fund investment may have been tax-deferred at the state level in one year but fully taxable in another.

Taxpayers should work closely with their advisors now to confirm state conformity and develop a plan in preparation for their QOZ gains that will be recognized in 2026. Early preparation will allow for cash-flow planning, strategic use of losses, and optimal coordination among advisors to minimize the overall tax burden.

Learn More About QOZ Program Updates

If you have any questions, please contact Mark Schneider, Partner and Real Estate Tax Leader, or your Anchin Relationship Partner.