Calendar year 2026 represents a major inflection point for Opportunity Zone (OZ) investors and Qualified Opportunity Fund (QOF)managers. As OZ 1.0 hits its mandatory deferred gain reporting date on December 31, 2026, proactive planning is essential to optimize tax outcomes, maintain fund compliance, and position for the transition into OZ 2.0 under the One Big Beautiful Bill Act (OBBBA).
Below are the most important issues investors and fund managers should be reviewing now.
Deferred gains must be recognized December 31, 2026, unless an earlier Inclusion Event occurs.
Common Inclusion events include:
Because investors generally have little or no tax basis in their QOF interests prior to gain recognition, even modest distributions can trigger unintended taxable events.
Related tax payments may be due on January 15, 2027 or April 15, 2027, depending on the taxpayer’s overall 2026 tax position, so careful analysis is required.
As the December 31, 2026 recognition date approaches, taxpayers with significant deferred gains should consider:
The OZ statute provides a taxpayer-favorable provision: the recognized gain is the lesser of:
For projects still under construction, not fully leased up, or operating businesses in early stages, valuation discounts (including minority discounts) may significantly reduce the recognized gain.
From the lower or these two amounts, the taxpayer still gets to reduce their gain by the 10% or 15% basis increase, provided they held their QOF interest for 5 or 7 years, respectively, prior to December 31, 2026.
The general QOZB Working Capital Safe Harbor Period(s) may have expired – or may expire - prior to December 31, 2026.
Now is the time to review your QOZB Balance Sheets and determine what working capital is still “reasonable” under OZ rules. In some cases, partial distributions could be required prior to year-end 2026 to maintain fund compliance.
Investments made in:
Taxpayers should closely review QOF funding dates to determine when those basis step-ups apply since this will impact the specific timing of any pre-year-end distributions, to ensure the full step-ups are achieved.
QOFs must hold at least 90% of their assets in qualified opportunity zone property, measured by:
It is important to continue reviewing this even after the gain deferral period ends to ensure your QOF is not subject to penalties.
Substantial Improvement (doubling of basis) must be generally completed within any thirty-month period after the acquisition of any used tangible opportunity zone property. Used property is any OZ-sitused property that had previously been placed in service for depreciation purposes.
The OBBBA introduced OZ 2.0 for investments made on or after January 1, 2027, including:
Taxpayers should be aware of the overlap and transition between the old and new regimes and plan 2026 gain events to ensure that January 1, 2027 falls within the 180-day reinvestment window.
This can be accomplished through:
Understanding the overlap between OZ 1.0 and OZ 2.0 is critical to maximizing outcomes.
For additional information and planning ideas, please contact the HCVT OZ Team at: OZTeam@hcvt.com
You may also find these resources helpful:
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