ARTICLE | January 18, 2026
Authored by RSM US LLP
Qualified Opportunity Zones (QOZ), introduced as part of the Tax Cuts and Jobs Act (TCJA) of 2017, have encouraged investment in economically distressed communities and allowed investors to defer and reduce certain capital gains taxes. However, as of Dec. 31, 2026, the deferral period is over for these original gains, and taxpayers can face significant tax bills without the necessary cash to satisfy the obligation. There are many things that taxpayers can do throughout this year to limit the cash outflow at the end of the year, including:
- Harvesting and generating other capital losses to offset gains.
- Utilizing charitable contributions to reduce the overall tax due.
- Determining the proper value of QOZ investments that have decreased in value.
While the One Big Beautiful Bill Act (OBBBA) introduced the second tranche of QOZ investments to begin Jan. 1, 2027, this article primarily focuses on the end of the first program and the gains that are coming due this year.
One of the key tax benefits of QOZs will expire soon
The TCJA first introduced QOZs in 2017 offering significant tax benefits to investors to defer and reduce capital gains recognition. Investors who reinvested eligible capital gains into a QOZ or QOF within 180 days of the disposition that produced the capital gains would not have to recognize those gains until the earlier of: (1) the date the investment is sold or exchanged or (2) Dec. 31, 2026. Those investors who took advantage of this QOZ deferral period may no longer be able to defer the inevitable at the end of 2026.
When planning for liquidity around this recognition event, it is important to understand how much gain is going to be recognized, as well as how best to prepare.
How much gain must be recognized?
The amount of capital gain recognized is the difference between the investor’s adjusted basis in the initial investment and the lesser of:(1) the amount of gain that was originally deferred or (2) the fair market value of the QOZ on Dec. 31, 20261. This creates a situation where the recognition event does not produce the cash flow to pay the capital gain tax.
Adjustments to basis
The amount of recognizable gain can be decreased with adjustments to basis that are available.
- If the investor held the QOZ investment for at least five years they receive a basis increase equal to 10% of the deferred gain.
- If the investor held the investment for at least seven years, they receive an additional 5% increase to their basis in the QOZ for a total of 15% of the deferred gain.
- The five and seven year investment holding periods must be met as of Dec. 31, 2026 to receive the increases to basis.
Capital gains retain their tax character
Capital gains reinvested in QOZs will retain their original tax character (either long-term or short-term) as of the day they were reinvested and will be subject to the applicable tax rate for the type of gain.
Planning strategies for the inevitable
Preparing now by implementing tax saving strategies will ensure investors have the liquidity to fund any forthcoming capital gains tax liability.
Harvest capital losses
Harvesting capital losses throughout 2026 and exploring investment strategies that may generate additional losses in the short term can help position investors more favorably if liquidity is a concern.
- Selling other loss positions throughout the year may help to maximize the losses available to offset end-of-year gains rather than harvesting these losses once a year.
- Tax-aware long/short strategies can create a broad, diversified portfolio with the intent of capturing up-front losses and further deferring gains.
- Abandoning partnership interests with minimal or no value can trigger losses on those investments, which may release suspended passive losses.
Making charitable contributions
Beginning in 2026, charitable contributions will be subject to a 0.5% floor and an overall itemized deduction cap. Although charitable contributions still should be considered, these new limitations may significantly reduce the tax reduction benefit of the contribution.
Valuation
Investments in the market have generally been positive since many of these original investments. However, the current fair market value (FMV) of the QOZ investment may have declined more significantly than the original investment, driven by economic factors, such as rising interest rates relative to 2018–2020 levels, increased costs from tariffs and other market pressures. Lack of control of the asset, or any restrictions on marketability, may reduce the FMV of the investment. Proper valuations can limit the amount of gain recognized. Working with a qualified appraiser in this area is key to accurately valuing the interest and limiting cash tax payments and risk.
Sale of investment
For those investments that have decreased in value and/or the investment is unlikely to generate future appreciation, it may be time to cut your losses and realize the gain on Dec. 31, 2026. While selling the investment may mitigate valuation risk and provide liquidity to cover tax obligations, it can also trigger unintended tax consequences that could disrupt other strategic plans.
Potential considerations
- Assess the performance of the QOZ or QOF investment and weigh the benefits of continued holding versus disposing of the investment. If the QOZ investment is held for at least 10 years, any appreciation on the sale of the QOZ investment itself can be completely excluded from gross income.
- Many transfers, such as gifting, transferring the investment to a C corporation or an S corporation, can trigger the gain in the QOZ investment early.2 However, gifting the interest to a grantor trust will avoid triggering the recognition of any gain until Dec. 31, 2026. It's u
- For those looking to limit gain through a lower valuation in 2026, realize that valuation is more an art than a science. The IRS often challenges valuations, and depending upon the tax at risk, this may not be a time to save professional services fees.
- Several states did not conform to the QOZ rules back in 2018; therefore, gain may only need to be recognized for federal purposes and not at the state level.
- Work with your tax advisors and financial planners to ensure tax compliance and optimize your strategy based on evolving IRS guidance and personal financial circumstances.
Eligible capital gains that were deferred by reinvestment into QOZ cannot escape tax liability forever. Absent an earlier disposition, Dec. 31, 2026, will trigger the recognition of those deferred capital gains. Preparing for liquidity and strategizing now with your financial planners and tax advisors can decrease the strain on your bank account when it comes time to pay your 2026 estimated tax payments and file your 2026 tax returns. While there may still be outstanding questions surrounding the Dec. 31, 2026 recognition date, it is imperative to plan and strategize now.
Please connect with your advisor if you have any questions about this article.
1 Section 1400Z-2(b)(2)(A)
2 Reg. section 1.1400Z2(b)-1(c)(4)(ii)
This article was written by Andy Swanson, Christian Wood, Scott Filmore, Karen Fitzpatrick and originally appeared on 2026-01-18. Reprinted with permission from RSM US LLP.
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