Opportunity zone tax bill looms as $75bn in deferred gains comes due

Some investors face an opportunity zone tax bill at the end of 2026, when a federal deferral for capital gains routed into Qualified Opportunity Funds expires. The Treasury Department’s Office of Tax Analysis said in a new working paper that deferred gains in the program totaled $75 billion at the end of 2024.

Opportunity Zones were created under the 2017 Tax Cuts and Jobs Act. The zones are economically distressed communities selected by states and certified by the Treasury Department, while Qualified Opportunity Funds are investment vehicles that direct capital into eligible projects in those areas.

The tax structure gave investors several incentives to shift realized capital gains into those funds. Investors could delay tax on gains from other assets, and those who held their Opportunity Fund investment for 10 years generally could avoid tax on gains generated by that fund investment, according to program rules described by the Internal Revenue Service.

When is the opportunity zone tax bill due?

The deferral period ends on Dec. 31, 2026. Jason Watkins, a partner at Novogradac & Co. who works on Opportunity Zone issues, said that gains deferred from 2018 onward become taxable as of that date, regardless of when the investor entered the program.

The final liability will differ by investor because earlier entrants received additional basis adjustments. Investors who placed realized gains into a Qualified Opportunity Fund by the end of 2019 can receive a 15% step-up in basis on the deferred gain, meaning 85% of that gain is taxable if they remain eligible. Investors who entered by the end of 2021 can receive a 10% step-up, while later investors received only the deferral benefit on the original gain.

A basis step-up reduces the amount of gain subject to tax. In this program, it does not erase the original deferred gain, but it can lower the taxable portion for investors who met the early deadlines.

Ryan Firth, a certified financial planner and certified public accountant in Bellaire, Texas, told CNBC that investors should have planned for the tax liability and set aside cash to pay it. Watkins said some funds may have arranged liquidity for investors through debt financing or other distributions.

Who invested in Qualified Opportunity Funds?

Treasury researchers counted about 12,800 Qualified Opportunity Funds at the end of 2024, with roughly 41,000 investors. About 85% of the investors were individuals, while the rest were corporations. The typical individual investor had adjusted gross income of $738,000 in 2024, according to the Treasury working paper.

Funds can back a range of qualifying investments, including new housing, property improvements, startup businesses and other local projects. For investors, capital gains tax applies to profit realized when an appreciated asset is sold. Long-term gains on assets held for more than one year are taxed at 0%, 15% or 20%, depending on income, while short-term gains are taxed as ordinary income.

Watkins said he expects relatively few investors to sell fund interests solely to cover the tax bill because the 10-year holding period can allow a tax-free exit on gains from the Opportunity Fund investment itself.

How will Opportunity Zone tax benefits change in 2027?

President Donald Trump’s tax and spending legislation enacted last summer made Opportunity Zones permanent. The Economic Innovation Group, which developed the policy concept, said new zones are being nominated and are scheduled to take effect on Jan. 1, 2027.

Under the revised structure described by Watkins, new investors will receive a five-year capital gains deferral and a 10% basis step-up after that period, regardless of when they invest. Funds focused on rural areas will carry a larger incentive: a 30% basis step-up on the originally deferred gains after five years, Watkins said.

This story draws on original reporting from CNBC.