Investors who deferred capital gains through Qualified Opportunity Funds are approaching a tax deadline, with a new Treasury Department Office of Tax Analysis working paper putting the aggregate value of unpaid deferred gains at $75 billion as of the end of 2024.
The Qualified Opportunity Fund structure was authorized under the Tax Cuts and Jobs Act of 2017, which allows investors to place realized capital gains from other investments into funds directed toward economically distressed areas nominated by states and certified by the Treasury Department. In exchange, investors have been able to postpone tax on those gains, with the deferral period set to close at the end of this year. Jason Watkins, a partner with accounting firm Novogradac & Co. who specializes in Opportunity Zones, indicated that all deferred gains become taxable once the deferral period lapses on December 31, 2026, regardless of when between 2018 and the present the original deferral began.
Treasury's research counted roughly 12,800 Qualified Opportunity Funds in existence at the end of 2024, holding investments from about 41,000 participants. Individuals accounted for approximately 85% of those investors, with the remainder made up of corporations. The typical individual investor reported adjusted gross income of $738,000 in 2024. Fund capital has gone toward projects including new housing developments, property upgrades, startup financing and other locally qualifying initiatives.
The size of an investor's eventual tax bill depends on entry timing. Those who committed realized gains to a fund by the end of 2019 qualify for a 15% step-up in basis, meaning only 85% of their deferred gains will ultimately be taxed. Investors who entered by the end of 2021 receive a smaller 10% step-up, while those who missed both windows retain only the deferral benefit itself, with the full amount becoming taxable. Certified financial planner and CPA Ryan Firth said, "Hopefully they've planned for it and realize they'll owe taxes on these gains," adding that funds have been set aside to cover it.
Some funds have offered investors liquidity ahead of the deadline through debt financing or other distributions to help meet the tax obligation, according to Watkins. He said the prospect of an eventual tax-free exit after a full ten-year holding period makes large-scale early withdrawals unlikely, since investors who remain in a fund for a decade avoid tax on the investment's own appreciation entirely.
Legislation enacted last summer made the Opportunity Zone program permanent and established a rolling ten-year cycle for designating new zones, with the next round of nominations underway and due to take effect January 1, 2027, according to the Economic Innovation Group, the think tank credited with originating the concept. Under the revised structure, all investors will receive a uniform five-year capital-gains deferral paired with a 10% basis step-up, replacing the current system in which the step-up depends on entry date. Watkins said the change "provides investors with more certainty" regardless of timing. Investments directed toward rural areas will carry an additional incentive, with a 30% basis step-up available after five years, he said.
With the current deferral period ending this year and a restructured incentive regime taking effect in 2027, funds and their investors face a transition in how future capital placed into Opportunity Zones is taxed, alongside the immediate liability now crystallizing on gains deferred since 2018.
