Since its enactment in 2017, many taxpayers have taken advantage of the opportunity to invest in Qualified Opportunity Zone (“QOZ”) investments. If a taxpayer has a capital gain, the gain can be deferred through such an investment. These deferred gains mature on December 31, 2026.
While QOZ investments can provide additional tax benefits, this article focuses specifically on the treatment of deferred gains as they become taxable.
The 2025 Tax Act (commonly referred to as the One Big Beautiful Bill) changed the QOZ rules beginning in 2027. However, those updates do not affect investments made under the original framework established by the Tax Cuts and Jobs Act of 2017. This discussion applies only to those original provisions.
How Deferred Gains Will Be Recognized
As deferred gains on the first generation of QOZ investments are triggered on December 31, 2026, those amounts become 2026 taxable income. Thus, the time to “pay the piper” is coming soon. A fresh look at how this deferred QOZ gain becomes 2026 taxable income is warranted.
On December 31, 2026, the gain to report is the lesser of (a) the remaining deferred gain or (b) the gain that would result if the investment were considered sold at its fair market value on that date. For the first standard, the remaining deferred gain is clear as shown on form 8997, which is the form where the condition of the QOZ deferral gain(s) is annually accounted for to the government. The amount to include in 2026 income may be further adjusted downward if the investment was held for 5 years or more on the expiration date of December 31, 2026. It is this second standard (above) where the planning opportunity lies.
Taxpayers who believe that their QOZ investment has declined in value since the investment might want to investigate where the second test is a better result. Some reasons why this decline in value may have occurred include –
- Decline in real estate values due to market or other conditions, such as loss of long-term tenants,
- Casualty losses in the area which have changed the business environment,
- Operating losses for an active business, and
- For projects actively under construction, additional risks may apply for the uncertainty in timing and completion.
- Where Planning Opportunities Exist
Establishing a supportable fair market value of the investment is key. Fair market value is defined by the IRS in Revenue Ruling 59-60 as “the price at which a willing buyer and willing seller would transact, with neither party under compulsion to buy or sell and both having reasonable knowledge of the relevant facts.”
Depending on the nature of the QOZ investment, determining fair market value may involve a real estate appraisal, a business valuation, or both. For investments held through business entities, valuation professionals may also consider discounts for lack of control and lack of marketability. A lack of control discount reflects a reduction in value due to the member or shareholder’s inability to control or influence decisions and day-to-day activities. A lack of marketability discount is reflective of a member or shareholder’s inability to quickly sell or convert the interest to cash and lack of a ready and available market. These discounts can present significant potential value reduction for a minority interest.
Establishing Fair Market Value
Because the amount of deferred gain recognized in 2026 may depend on the investment’s fair market value, obtaining a well-supported appraisal or business valuation can help taxpayers understand their potential tax exposure, evaluate planning opportunities, and provide valuable documentation in the event the IRS examines the reported gain.
While the formal valuation would have an effective date of December 31, 2026, and the final report would be completed in 2027 before any filing deadlines, DMJPS’ valuation and tax professionals can work with you well before year-end to provide planning guidance and preliminary value estimates, allowing time to identify and evaluate potential opportunities and benefits.
DMJPS tax and valuation professionals work together to help you:
- Assess potential exposure related to 2026 QOZ gain recognition
- Evaluate whether a valuation analysis could reduce taxable income
- Determine whether the potential tax savings justify the cost and effort of a valuation
Taking action now provides time to evaluate options and make informed decisions ahead of the 2026 recognition deadline.
Sara Maddox, ASA, ABV, CVA, EA
Sara Maddox is a Senior Manager and Director at DMJPS CPAs + Advisors in Business Valuations. At DMJPS, her work includes valuing business enterprises using fundamental and complex analysis for purposes of succession planning, gift and estate tax, mergers & acquisitions, litigation matters, and shareholder buyouts. She works with a variety of industries, including retail/wholesale, real estate and construction, professional and personal services, and manufacturing.