Investors who used Qualified Opportunity Funds to defer capital gains taxes will see their deferral period end on December 31, 2026, at which point accumulated gains become taxable. The program, authorized through the Tax Cuts and Jobs Act of 2017, directed investment to economically distressed areas nominated by states and certified by the Treasury Department.
As of the end of 2024, deferred gains totaled $75 billion across approximately 12,800 Qualified Opportunity Funds with roughly 41,000 investors. About 85% of investors are individuals with a typical adjusted gross income of $738,000, according to Treasury Department research. The funds have financed various projects including new housing, property upgrades, startup businesses, and other local initiatives.
Investors who entered these funds by specific deadlines received additional tax benefits. Those who invested by the end of 2019 are eligible for a 15% step-up in basis on deferred gains, meaning only 85% of those gains face taxation. Investors who entered by the end of 2021 receive a 10% basis step-up. Capital gains are taxed based on holding period, with long-term gains (over one year) taxed at 0%, 15%, or 20% depending on income level.
Experts anticipate most investors will remain in their funds beyond 2026 to capture the primary incentive: tax-free gains after holding for 10 years. Some funds have provided liquidity mechanisms through debt financing or distributions to help investors manage their tax obligations.
Starting January 1, 2027, the program structure will change under legislation enacted last summer that made Opportunity Zones permanent. New zones will be designated every 10 years, with the next round currently underway. All investors will receive a standardized five-year capital gains deferral with a 10% basis step-up, regardless of investment timing. Investments in rural-focused funds will qualify for an enhanced 30% basis step-up on originally deferred gains after five years.
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