Why December 31, 2026 matters
The original Opportunity Zone program let you defer tax on a reinvested gain, but not forever. Congress set a fixed end date. Every gain deferred under the original rules is recognized on December 31, 2026, no matter when you invested, unless an earlier event like a sale already triggered it (IRC §1400Z-2(b)(1)).
When Notice 2026-40 came out, Ashley summed it up this way:
"If you defer a gain into a QOF before 2027, that deferred gain is coming into income on December 31st, 2026. You will pay your taxes. You cannot roll it into a new fund."
That income goes on your 2026 return. For most people that means the tax is due in April 2027, so the cash planning starts now.
How the amount is figured
You don't automatically owe tax on the full gain you deferred. The amount you include is the smaller of two numbers (IRC §1400Z-2(b)(2)):
- The gain you deferred, or
- The fair market value of your fund interest on December 31, 2026
From that smaller number you subtract your basis. Your basis starts at zero. If you held five years by the end of 2026, you get a 10% increase, which required investing by December 31, 2021. Holding seven years adds another 5%, which required investing by December 31, 2019. If you came in later, Ashley's advice is short: "Don't look for a step up that's not there."
Example: you deferred $500,000 in 2020. Five years of holding gives you a $50,000 basis. If the fund interest is worth more than $500,000, you include $450,000.
When fair market value is lower
If your fund interest is worth less than the gain you deferred, the lower value is the starting point. A project still under construction, or an interest that's hard to sell, may be worth less than you put in.
That value has to hold up if the IRS asks. A qualified appraisal is how you support it, and it must reflect real facts about the fund and the interest. A discount isn't a given. The rules add back your share of the fund's debt and any losses you have already taken, so the number is often smaller than people expect. As Ashley puts it, sometimes the juice ain't worth the squeeze. Cost segregation and bonus depreciation on the project often do more. Talk it through with your CPA early, because appraisals take time.
Questions to ask now
A short list to work through with your CPA and your fund manager before the end of the year:
- How much gain did I defer, and in what year did I invest it?
- Did I hold long enough by December 31, 2026 to earn the 10% or 15% basis increase?
- What will the fund interest be worth on December 31, 2026, and who will support that value?
- Will the fund make a distribution to help cover the tax?
- Are my Form 8997 filings up to date for every year I've held?
Having those answers early gives you time to set aside cash and avoid a scramble in April.
What you can still do
- Plan the cash. The tax is real money due in April 2027, and the fund usually doesn't pay it for you.
- Keep holding. The ten-year benefit is separate. In Ashley's words, "Recognizing that gain does not kill your 10-year tax-free treatment." If you hold at least ten years, the growth on your investment can be free of federal capital gains tax when you sell.
- Keep records current. Your fund interest still needs a clean audit trail, and Form 8997 is still due each year.
One limit: the gain recognized on December 31, 2026 can't be rolled into a new Opportunity Zone investment. New gains you realize can use the new rules, explained in What is OZ 2.0?
If you're not sure where your numbers land, a 15-minute call is a good place to start.