Opportunity Zone Deferral Ends in 2026: Is Your Tax Bill Smaller Than You Think?
Originally published on October 29, 2026
“Unfortunately, tomorrow is today now, and that deferral is gonna be coming in at the end of the year here.” – Daniel Roccanti, CPA
If you invested in a qualified opportunity zone fund a few years back, your opportunity zone deferral ends December 31, 2026. In this episode of Your CPA’s Take on Real Estate, Daniel Roccanti, CPA and Kyle Paxton, CPA explain how much gain you’ll actually recognize and how to plan for the tax that comes with it.
The gain is mandatory and can’t be rolled into a new fund, but how much you owe isn’t set in stone. Daniel and Kyle walk through the “lesser of” rule that can lower your recognized gain if your fund lost value, the 10% and 15% basis step-ups many investors already qualify for and where to find your deferred gain on Form 8997.
They also cover capital loss harvesting, real estate professional status, estimated payment deadlines and the annualized income method, plus what to ask your fund operator if your cash is still tied up in the investment.
Resources
Transcript
[00:02] Daniel Roccanti: Welcome to Your CPA’s Take on Real Estate. I’m your host, Daniel Roccanti, back here with my co-host, Kyle Paxton, for another great video. If you invested in one of those opportunity zones a few years back, this is an important episode for you. When you first invested in that, you probably remember, “Hey, I got some benefits. I got to defer my tax.” But that’s a tomorrow problem. Well, unfortunately, tomorrow is today now, and that deferral is gonna be coming in at the end of the year here, so we’re making sure that all our listeners and clients are prepared for that moment.
[00:26] Kyle Paxton: Those five-year windows went pretty quick, Daniel. Back in 2018 when we kicked this thing off, 2026 was way far away. Here we are.
[00:44] Daniel Roccanti: I know. It just felt like it was never gonna get here. So let’s do a quick recap. Some of us haven’t even thought about opportunity zones in a few years. Originally, when you sold real estate or stock (it didn’t have to actually be real estate, it could be anything that produced a capital gain), you could reinvest those capital gains within a certain timeframe into one of these opportunity zone funds. If you did that within the eligible timeframe, then you got to defer that gain until the end of 2026, or the earlier of 2026 or an inclusion event, which basically just means that you took your money out of the fund, or the fund sold and was no longer an opportunity zone fund.
[01:47] Daniel Roccanti: But for all of us who have kept our investments in the fund, now we have to pay gain in 2026 on that original gain. So we need to be prepared, because while we have a taxable gain that we have to prepare for, we still might not have our money, and so we might have a tax without liquidity problem here.
[02:08] Kyle Paxton: All good points, Daniel. Before we really dive into the tax side in 2026 that’s coming up here, I want to emphasize a point. QOZ 2.0 is here. It’s back, 2027 on. This is still a very good play for tax mitigation, real estate investing, all that good stuff, and we’re having a lot of conversations around this. We’re not gonna go into 2.0 in this video, but it’s something to be aware of. And one point I want to make before we get back into this: Daniel almost lost me in the intro with all the nuances that go into these things, the timelines, the thresholds you have to meet every year to stay a qualified opportunity zone, and there’s a lot here. So make sure you have good legal counsel and good accountants around you to help set these things up the right way and mitigate surprises. We worked through some of those the last several years, and they’re not a great time.
[02:52] Kyle Paxton: So as Daniel said, the capital gain’s coming. For tax year 2026, filed in spring 2027, if you put a million dollars into a qualified opportunity zone back in 2020, that million dollars reduced your capital gains by a million dollars. That’s just been parked on your tax return since then, and come the 2026 tax year, spring 2027, we recognize that million dollars of income, and there may not be cash attached to it. So that’s a big planning opportunity we’re working on with our clients right now, making sure we understand that it’s coming. Is there a way we can mitigate it? Do we have the cash to pay it? What do we need to do?
[03:48] Daniel Roccanti: Yes. And this is important to know. We need to realize what gain is gonna happen, so what taxes we owe, and then we can plan for the liquidity issue so we can pay for it. There are two distinct benefits here, and I do want to quickly recap that this is just the first one: the deferral of the original gain, which ends at the end of 2026. There is also an exclusion of your future appreciation after 10 years in the qualified opportunity zone fund. That still remains intact, and to get that, you have to keep your money in the qualified opportunity zone fund.
[04:37] Daniel Roccanti: That’s important because I’m leaving my money in the investment, but now I have to pay taxes on those gains, and that creates a timing issue because my funds are still in the investment. So a lot of what we’re working on with our clients today is, how do we pay that? Hopefully a lot of these GPs for these opportunity zone funds are looking into cash refis and finding ways to give that capital back to their investors. But what if that’s not the case? So let’s start out by finding out how much gain I actually need to recognize at the end of 2026.
[05:05] Kyle Paxton: Sorry to cut you off, Daniel. I want to chime in. What’s nice with this is that everyone’s recognizing these gains at the same time. That’s gonna change with 2.0, where it’s kind of a rolling five-year window. For part one here, everybody who has a QOZ is doing this at the exact same time. So to your point, Daniel, I’m looking for the GPs to get creative on financing and figure out how we can get cash back in our investors’ pockets in a way that makes sense in order to pay the tax liability.
[05:46] Daniel Roccanti: Yes, exactly. And I know a lot of those GPs are already looking into it. So what is the deferred gain that needs to be recognized this year? You might not know it. It’s the lesser of the remaining deferred gain that you originally deferred or the fair market value of the qualified opportunity zone fund investment. That’s important to know, because let’s say I deferred a million dollars that I invested in one of these qualified opportunity zone funds. My investment in that new fund is a million dollars, but that could go up or down, and if it goes down, that could affect how much actual gain you need to recognize.
[06:36] Daniel Roccanti: So here’s a quick example. My deferred gain is a million dollars, but my fair market value in the QOF is $1.2 million. The lesser of those two is a million, so my gain is the million dollars. You might have received some additional step-up basis, but we’ll talk about that a little bit later. In the second scenario, let’s say it’s the same million dollars I invested, but now my fair market value in the QOF went down, and it’s only $800,000. Now the lesser of the million and $800,000 is $800,000, and I only have to recognize $800,000. I think this is a very key opportunity for several investors here, and I think it will be missed because most people will just recognize the deferred gain and don’t know that there is an opportunity that they could actually pay less.
[07:39] Daniel Roccanti: But it’s a little bit more complicated, because you’ve got to determine your fair market value, and you need some kind of valuation. With a lot of these qualified opportunity zone funds, it’s not like a stock price that you would see. It’s not like I go look up Google’s stock price, multiply it by how many shares I have as of 12/31/2026, and boom, I know my value. So that’s gonna require a lot of these funds to actually go out there and get valuations. I don’t know if those will be happening, but if you feel like your investment has decreased, you should be talking to the operators and managers of your investments and seeing if they should get a valuation so you can really determine what your true value is, because it might turn around and be a lot less taxes for you.
[08:28] Kyle Paxton: Let’s talk about tax planning. The time to do this is right now. I want to take us into loss harvesting and valuation. Let’s talk about what these investors who have these capital gains coming can still influence before December 31st. It’s a great time to sit back, look at your portfolio and review the appreciated and depreciated positions. If you have capital losses lingering out there that are unrealized at this point, and you can trigger a realization event, you can use those to offset capital gains under the normal gain and loss netting rules. Of course, I want to be mindful of the character of the gain and where the gains or losses are occurring, so we have to include all of that.
[09:10] Kyle Paxton: What I’m dancing around here a little bit is this: if there are positions you’re already considering exiting, whether that’s bad investments you’re in outside of the qualified opportunity zone through partnership structures or just stock positions, 2026 might be a good year to pull out of those if you have that capital gains event coming from the qualified opportunity zone.
[09:37] Daniel Roccanti: Kyle’s right here. If you’re going to have one of these opportunity zone gains coming due, you can’t defer it any longer. It’s mandatory, and I want to make sure people realize that. You can’t just reinvest in a new opportunity zone. It’s not like a like-kind exchange. It’s nothing like that. It’s mandatory recognition of the capital gains at the end of 2026. So you have more opportunities while 2026 is still around. Capital loss harvesting is a great opportunity to look at where you can take some capital losses in stocks and things like that. If you have a financial advisor, this is a great time for them to be looking at that. The valuation one that I already went over is another great opportunity.
[10:25] Daniel Roccanti: Look at what the true valuation of your investment is. If I feel like it’s gone down, which it could, because a lot of these opportunity zone investments happened right before or right after the pandemic, and real estate hasn’t been doing as well recently, there is a true chance that the valuation could be down, and that’s a good way to also shelter a lot of those capital gains. But at some point, you’re still gonna have to pay the taxes. The gain is coming, so you need to figure out what you can do to minimize it, but you still need to get ready for it.
[11:08] Daniel Roccanti: Because of the 12/31 recognition date, taxes are due April 15th, 2027. So you need to go back and ask, “Am I making the appropriate estimated payments?” That last fourth-quarter payment is due January 15th, not April 15th. You want to make sure you’re not paying any underpayment penalties, because the safe harbor amount is usually based on last year’s taxes. So if you had a good year last year, you might be required to make a higher quarterly payment. But even if not, we want to make sure we understand our tax liability and needs for April 15th.
[11:58] Daniel Roccanti: Another one, if you are getting underpayment penalties, is that you can annualize that income. Because the actual recognition is 12/31, I’m recognizing this entire gain in the fourth quarter, which means you can push that income into the fourth quarter. So if I am paying an underpayment penalty because I didn’t make my required safe harbor payments, I can at least use that method. Instead of getting an underpayment penalty for the first, second and third quarters, it’s at least being pushed back to the fourth quarter. You’d be surprised how many people don’t even consider this.
[12:42] Kyle Paxton: And it can be material.
[12:42] Daniel Roccanti: When you have a large sum of money that comes in at the end of the year, you don’t need to be paying penalties. If you don’t annualize it, the IRS treats it like it came in evenly throughout each quarter, but you have to actually update that on your return.
[13:01] Kyle Paxton: Yeah, that gets missed a lot. This gets us back to holistic tax planning. This is one thing we’re looking at when we’re doing our 2026 tax planning. The time is now to make sure we’re covered on those things. We talked about a couple different strategies on potential loss harvesting and valuation, but a lot of my clients who have entered these qualified opportunity zone deals meet real estate professional status. So while we have this capital gain event, they have these activities that they materially participate in and meet real estate professional status. We still have all the same good toys of depreciation and those kinds of strategies that we’re implementing to offset other sources of income to help stomach this capital gain a little bit better. This is one piece we’re looking at as part of the bigger picture, especially as it pertains to real estate professionals, but there are a lot of strategies we can use and talk through as we get to year-end to help with this.
[14:00] Kyle Paxton: So let’s talk about step-ups a little bit. With the legacy program, the QOZ 1.0 we’re exiting here, if you hold that QOZ for at least five years, you get a basis step-up equal to 10% of the deferred gain. A lot of these gains we’re talking about are gonna meet that five-year threshold. And after at least seven years, the benefit jumps to 15%. To have the five years completed by December 31st, 2026, the investor generally needed to invest in the opportunity zone by December 31st, 2021. For seven years, 2019. This isn’t a planning strategy necessarily. This cake is baked. But we get to look at what we can pull in to help mitigate the capital gain event we’re gonna recognize.
[15:02] Daniel Roccanti: This is one we want to make sure we’re not missing, because you should be getting this step-up basis, but you have to make sure it’s properly on your return. So what does the five-year, 10% step-up mean for when I made my investment? It means you had to invest in the opportunity zone fund by the end of 2021. If you want the full 15%, it had to be by the end of 2019, which was pretty quick, because this whole thing came out in 2018. Kyle and I both remember there was a long time when no one knew what they were doing.
[15:24] Kyle Paxton: Including the IRS.
[15:24] Daniel Roccanti: Yeah. 2019 was basically the first year you could truly invest in an opportunity zone. So if you got in there quickly, you might have gotten the entire 15%, but a lot of people might have taken a couple of years and are still eligible for the 10%. Back to that million-dollar gain: with the 10% step-up in basis, it’s only $900,000. That’s $100,000 you get to save, but you need to make sure it’s on your tax return correctly if you qualify. That’s just easy tax planning, making sure you’re getting all the benefits the law allows you.
[16:17] Kyle Paxton: There’s nowhere to hide here, because the beneficial owner of the entity that had the deferred gain (a lot of times I see this at the individual level) should have been filing Form 8997 all along, showing the gain that was deferred since the initial contribution. There are about four columns on the form, and one of them is when the investment was made. So it’s right there. We can see it. Hopefully that gets picked up and you make sure you get your step-ups. All right, Daniel, you want to take us home with what investors should do now as we get to year-end? Recap us a little bit.
[16:33] Daniel Roccanti: Yes, let’s do a little bit of a recap of what our investors should be looking for. The first thing you want to do is identify the qualified opportunity zone investment and what your deferred gain still is. Kyle made a good point here. Form 8997 on your 1040 is a good indication of the deferred gains in your qualified opportunity zone funds that you’re still carrying, because it should be reported on your tax return every year since you deferred. So if you’re not sure, go look at your last filed personal return or talk to your CPA and look at that form, the 8997.
[17:24] Daniel Roccanti: Then you want to go back and reconstruct the deferred gains, the holding periods and the tax basis. What is my gain? Do I get any of this step-up basis? Then you also want to look at whether the fair market value of my qualified opportunity zone fund investment is potentially lower than my deferred gain right now. If it is, what opportunities do I have to get a valuation and decrease that as much as possible?
[18:00] Daniel Roccanti: In the end, once you’ve figured out your gain, you need to project how much you’re gonna owe, and you need to understand when it’s due. Do I need to make my quarterly payment by January 15th? The final amount is due April 15th, so I need the cash, and that’s important because my cash for this investment is still tied up in the investment. So I need cash from other sources, or I need to talk to my operator about refinancing and see if they have opportunities to get my cash out early so I can pay those taxes. Unfortunately, there’s not a lot of ways around this. It’s mandatory. You can’t defer it any longer. There aren’t any tricks to move it and not pay the taxes. That’s how the legacy opportunity zone funds were written, with mandatory recognition at the end of 2026. So you need to be prepared for it.
[18:41] Kyle Paxton: I like the strategy I saw quickly squashed, of just doing another QOZ under QOZ 2.0 to offset it again, but unfortunately that’s not on the table for us. Anyway, Daniel, you and I love this stuff. Our real estate team loves talking about qualified opportunity zones. This is a big thing we do here at James Moore and a big part of where we bring value. Again, these structures can be complicated, and the requirements are nuanced. I’ve worked through IRS issues with these types of entities, and there’s a lot of value we get out of this. So whether it’s with James Moore or through your accountant, make sure your accountant is in tune with this. We’re happy to help with any questions you have and have fun conversations around these things. I say fun, fun tax conversations. They’re fun for me.
[19:47] Daniel Roccanti: Thanks, Kyle. I do want to rehash at the end here that this is just for the original, legacy opportunity zones. A bill was passed for the new opportunity zones that most people are calling Opportunity Zones 2.0. Those don’t become effective until 2027. Kyle and I will be shooting a video on that before the end of the year, but there’s still a lot that is unknown because the opportunity zones haven’t been finalized, so we’ll try to get more information on that. Thanks for listening to our video. We appreciate it, and if you like the content we provide, please subscribe. We’re looking forward to our next video and hope to have you listening.
Get Ready Before Your 2026 Gain Hits
Your deferral ends December 31, but you still have time to confirm your gain, check your fund’s value and plan for the payment. Watch the full episode above, and subscribe to Your CPA’s Take on Real Estate on YouTube so you don’t miss Daniel and Kyle’s upcoming episode on Opportunity Zones 2.0.
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