OZ 1.0 investors must recognize deferred gains on Dec. 31, 2026; rollovers generally barred

Deferred capital gains held in Qualified Opportunity Funds from the program's first iteration must be recognized on Dec. 31, 2026, and rollovers generally are not permitted, Commercial Observer reported on Oct. 21.

Roughly 25,000 distinct investors — 21,000 individuals and 4,000 corporate entities — have placed more than $100 billion of capital gains in QOFs since 2017, according to the report.

The amount recognized is the lower of the deferred gain or the investment's fair market value on Dec. 31, so the year-end valuation determines the reported amount. Investors can also deduct the basis increase earned for a five- or seven-year hold: 15 percent for funding on or before Dec. 31, 2019, and 10 percent for funding from Jan. 1, 2020 through Dec. 31, 2021.

In Commercial Observer's example, $1 million of deferred gain invested on Dec. 1, 2019 in an interest now worth $700,000 would generally produce $700,000 less the $150,000 basis increase, a net 2026 gain of $550,000. Special valuation rules apply to qualified opportunity zone businesses that used debt to finance losses or distributions; the report notes cost segregation studies and tax-loss strategies may mitigate the 2026 hit.

Property acquired after Dec. 31, 2026 generally will not qualify as qualified opportunity zone business property in a previously designated OZ 1.0 tract, according to Notice 2026-40 as the report describes it, with exceptions for property acquired under a written working-capital safe-harbor plan and for ordinary-course replacement or modernization property.

Unfinished OZ 1.0 projects must update their business plans and show at least 10 percent of total funding contributed to the qualified opportunity zone business and at least 5 percent of the budget spent or placed under binding contract.

Deferred gain is reportable in 2026 even if the investor still holds the interest, and that inclusion does not end the potential benefit of a qualifying sale after a 10-year hold. Notice 2026-40 bars reinvesting this deemed included gain in another QOF, though the report notes that a de-certification, asset sale or liquidation of the OZ structure before year-end may generate gain eligible for a new OZ fund.

For OZ 2.0, which applies to investments made on or after Jan. 1, the report says investors should identify eligible 2026 gains, the funding date each gain allows and potential OZ 2.0 locations while the new tract map takes shape. Valuation discounts require documentation and should not be assumed from a project's general financial difficulties.