Key insights
- Be ready for a tax bill without a sale. If you still hold a Qualified Opportunity Fund (QOF) interest on December 31, 2026, your deferred gain will come into income, so start planning for cash needs now.
- Your outcome depends on moving pieces. What you owe is based on a comparison, including your remaining gain, your basis, and fair market value — and changes in losses or distributions can shift the result.
- Valuation may change the result or confirm it. If fair market value is lower, a valuation may reduce recognized gain; in other cases, it simply confirms what you’ll owe so you can plan with clarity.
- Don’t wait to run the numbers. Reviewing your basis, allocations, and estimated value now can surface gaps early and give you time to adjust before the inclusion hits.
Prepare for taxes on OZ investments and know what you owe.
If you still hold an Opportunity Zone investment, the clock is ticking toward a tax event you can’t postpone any longer. On December 31, 2026, your deferred gain becomes taxable — even if you haven’t sold your investment.
What you owe depends on more than your original gain, and the outcome may not be intuitive. Knowing how the calculation works can help you plan for cash needs, avoid surprises, and decide whether a valuation could affect your result.
To understand how this plays out, learn how the Opportunity Zone investment rules work in practice and some planning strategies to reduce your tax liability.
What’s happening with deferred gains on QOFs
Since the Opportunity Zone incentive was enacted as part of the Tax Cuts and Jobs Act, investors have used Qualified Opportunity Funds, or QOFs, to defer capital gains while investing in operating businesses and real estate located in designated areas.
For many longtime investors, that deferral period is nearing its end.
Unless an investor has already disposed of a QOF interest, deferred capital gains must be included in taxable income on December 31, 2026, even if the underlying investment is still held. Earlier recognition can occur if the investor sells or disposes of the QOF interest before that date.
For many investors involved in multi-year real estate developments, this represents the first inclusion event tied to their Opportunity Zone investment. As the deadline approaches, investors and fund sponsors tend to focus on three related questions:
- When is deferred gain recognized?
- How is the amount of gain calculated?
- When does an independent valuation of a QOF interest matter?
With that context in mind, the next step is understanding how deferred gain is determined and what drives the amount recognized.
How deferred gain is recognized and measured
The “lesser of” calculation drives the recognized gain outcome
The amount of gain recognized is determined using a comparison between two figures. The investor includes the lesser of the remaining deferred gain after any basis increases earned by holding the investment for five or seven years, or the gain that would result if the QOF interest were sold for its fair market value on December 31, 2026.
The hypothetical sale sets the QOF interest benchmark
This second calculation involves a hypothetical sale of the QOF interest. Tax basis plays a central role in that computation.
A QOF investment begins with a zero-tax basis because tax hasn’t been paid on the contributed gain. Over time, basis is adjusted for:
- Recognized gains
- Statutory basis increases tied to holding periods
- Investor’s share of partnership income, losses, and distributions
Basis changes over time, and can affect the result
Loss allocations reduce basis even when those losses are suspended under the passive activity rules. For investors in rental housing QOFs, depreciation deductions often create sustained loss allocations that can push tax basis below zero.
Negative basis can increase taxable gain
When basis is negative (e.g., due to debt-financed losses and distributions), the hypothetical sale calculation assumes a larger taxable gain. In many cases, this causes the hypothetical sale gain to exceed the original deferred gain.
When that occurs, the deferred gain becomes the amount included in income on December 31, 2026.
Why does valuation change the outcome for Opportunity Zone investments?
Net asset value isn’t the same as fair market value
Investors often receive net asset value estimates from fund managers and assume those figures represent the value of their QOF interest. For tax purposes, net asset value and fair market value reflect different concepts. Net asset value generally represents an investor’s proportional share of underlying assets minus liabilities, often modeled as though the assets could be liquidated.
Example of reducing recognized gain
Abigail defers $100 of gain by investing in a QOF partnership in 2022. The QOF invests in real estate that appreciates 5% annually. Abigail has been allocated $10 of cumulative tax losses from the QOF and has sufficient basis from liabilities to absorb the losses. She has not received any distributions.
By December 31, 2026, Abigail’s share of the net asset value of the QOF is $122. After applying a 35% discount, the FMV of the QOF interest is $79. Abigail’s gain recognized in 2026 is the lesser of the following:
Deferred gain ($100): Abigail is not eligible for the 10% or 15% basis step up because she invested in 2022, so her deferred gain remains $100.
Hypothetical sale gain ($89): If Abigail sold her QOF interest for its $79 fair market value, she would recognize $89 of gain ($79 proceeds plus $10 recapture of debt-financed loss).
While Abigail expected to recognize $100 of deferred gain, the valuation reduced her recognized gain to only $89.
A limited partner in a QOF doesn’t control asset sales, refinancing decisions, or liquidity timing. In addition, secondary markets for QOF interests remain limited, and buyers of existing interests usually don’t receive Opportunity Zone tax benefits.
Because of these factors, valuation standards commonly support discounts for lack of control, and lack of marketability when valuing illiquid partnership interests. In the Opportunity Zone context, professionally supported discounts frequently produce fair market values meaningfully below net asset value.
Valuation can reduce the amount of gain you recognize
An independent valuation is most likely to affect the amount of gain recognized when:
- Loss allocations and cash distributions have been relatively limited
- The fund’s net asset value has not grown significantly
In those situations, fair market value becomes the limiting factor in the “lesser of” calculation.
When valuation won’t change the deferred gain outcome
In other cases, a valuation confirms the deferred gain controls the result. This is common when depreciation and operating losses have driven tax basis well below zero or when strong asset performance has increased net asset value to a level that remains above deferred gain even after applying valuation discounts.
Stabilized multifamily housing QOFs frequently fall into this category due to accumulated depreciation.
Planning around the 2026 inclusion event
As the deadline approaches, Opportunity Zone investors are best served by focusing on mechanics rather than speculation. That includes:
- Confirming the amount of remaining deferred gain
- Reviewing how loss allocations and distributions have affected tax basis over time
- Assessing whether a valuation is likely to influence the “lesser of” calculation
For some investors, a valuation will support a lower recognized gain. For others, it will confirm the deferred gain may be recognized as scheduled. Either outcome supports clearer cash flow planning and fewer surprises.
Other strategies may help offset the tax impact of the deferred gain, such as harvesting unrealized losses in other investments during 2026 or charitable giving.
How CLA can help with Opportunity Zone investments
Opportunity Zones were structured as long-term investments, and the 2026 inclusion event reflects that design. Investors who engage with this milestone early and ground their planning in careful analysis may place themselves in a stronger position to manage both tax exposure and liquidity needs.
CLA can help you model potential outcomes by analyzing your remaining deferred gain, tracking changes in tax basis over time, and assessing how losses and distributions may affect the result.
We can also help determine whether an independent valuation is likely to influence your outcome and coordinate that analysis where it adds value.
Finally, we can help you evaluate other tax planning strategies, such as tax loss harvesting and charitable gifting, to reduce the tax burden from the gain inclusion.
Contact us
Prepare for taxes on OZ investments and know what you owe. Complete the form below to connect with CLA.