When Qualified Opportunity Zones (QOZs) began (with the Tax Cuts and Jobs Act (TCJA) in 2018), they were a way of deferring capital gains received. This year–the 2026 tax year–is when taxpayers who invested in QOZs will be paying the piper.
The way QOZs work for federal taxes under the TCJA is that if you invest in a QOZ (or a QOZ fund), you are able to defer a capital gain you have until the earlier of selling the investment or December 31, 2026. (There are specific time-frames and rules on investing in a QOZ.) If you hold a QOZ for five years (before gain recognition) you get a 10% step-up-in-basis on the deferred amount of gain; if you hold it for seven years, that increases to 15%. (There’s also a permanent exclusion of gain on the appreciation of the QOF investment–but not the deferred gain–if you hold the investment for ten or more years.) Let’s look at an example:
Russ had a $500,000 long-term capital gain in 2018. He followed the rules and invested the capital gain in a QOZ in 2018. He still holds the investment (now worth $700,000) at the end of 2026. On December 31, 2026, he will recognize $425,000 of long-term capital gain: Russ held the investment for more than seven years so he has a 15% reduction of gain (step-up-in-basis) of $75,000 from the $500,000 deferred gain.
(There’s now a QOZ 2, so to speak. The One Big Beautiful Bill has a new Qualified Opportunity Zone program for QOZ investments after 2026. QOZ investments in 2026 will be taxed based on the QOZ rules set in the Tax Cuts and Jobs Act. I’ll probably post on the new QOZ program late this year.)
If you invested in a QOZ, make sure you understand and prepare for the tax bill that’s coming late this year.
