High-income investors who used Opportunity Zone funds to defer capital gains taxes will see their deferral period end on December 31, 2026, according to recent Treasury Department analysis. The funds, authorized under the Tax Cuts and Jobs Act of 2017, were created to encourage investment in economically distressed communities designated as Qualified Opportunity Zones by states and certified by the Treasury Department. As of the end of 2024, approximately $75 billion in deferred gains remained in these vehicles.
There were roughly 12,800 Qualified Opportunity Funds in existence at the end of 2024, holding investments from approximately 41,000 investors. About 85% of investors are individuals, with the typical individual investor reporting adjusted gross income of $738,000 in 2024. The funds support various projects including new housing, property upgrades, startup businesses, and other qualifying local initiatives.
Investors who entered funds early received varying tax benefits. Those who invested by the end of 2019 using realized capital gains can claim a 15% step-up in basis on deferred gains, meaning only 85% of the gains will be taxed. Investors who participated by the end of 2021 are eligible for a 10% basis step-up. Those who missed these deadlines receive no additional benefit beyond the tax deferral itself.
While the deferral period ends this year, experts anticipate most investors will remain in their funds to capture the primary benefit — the ability to avoid taxes entirely on gains earned within the fund after holding for 10 years. Some funds have reportedly provided financing mechanisms to help investors cover their tax obligations.
Legislation enacted last summer made Opportunity Zones permanent and modified future benefits. Starting January 1, 2027, new provisions will take effect, including a standardized five-year deferral period available to all investors regardless of timing, along with a 10% basis step-up. Rural-focused funds will offer an enhanced 30% step-up on deferred gains after five years.
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