The Key Event: Mandatory Gain Recognition in 2026
December 31, 2026 is the date when deferred gains become taxable.
- The originally deferred gain becomes taxable in 2026, regardless of whether the investment has been sold
- This gain must be reported on the 2026 tax return (filed in 2027)
- The taxable amount is generally the lesser of a) the original deferred gain or b) the fair market value of the investment (less adjusted basis)
Importantly, this tax is often due without a corresponding cash distribution, creating a “phantom income” event.
Can the Deferral Be Extended?
No – current law does not allow further deferral beyond December 31, 2026. The deferral ends at the earlier of:
- The sale of the QOF investment, or
- December 31, 2026
While the Opportunity Zone program continues for new investments beginning in 2027, those rules do not apply to existing investments.
Should You Sell the Investment Before Year-End?
Generally, selling before December 31, 2026, will trigger earlier gain recognition and will not eliminate the tax liability.
However, timing a sale may be helpful in limited cases, particularly if the investment has declined in value, is expected to appreciate significantly over the remaining few months of 2026, or where other tax strategies are being coordinated.
Planning Considerations: Steps to Take Now
- Evaluate Capital Loss Opportunities – Taxpayers may benefit from harvesting capital losses in 2026 to offset the recognized gain.
- Assess the Investment’s Value – If the investment has declined in value, the amount of taxable gain may be limited under the “lesser-of” rule; that is, the gain to be recognized is the lesser of the deferred gain or the fair market value of the investment on December 31, 2026.
- Plan for Liquidity – Because tax may be due without receiving cash distributions, taxpayers should plan for how to fund the tax liability.
- Consider Broader Tax Strategies – Additional planning may include charitable giving strategies and other strategies to manage.
Don’t Lose Sight of the Long-Term Benefit
If a taxpayer holds a qualifying Qualified Opportunity Fund (QOF) investment for at least 10 years, the taxpayer may elect to increase basis to fair market value upon disposition, effectively excluding federal tax on post-investment appreciation attributable to the qualifying investment. So, while the deferred gain has to be recognized by December 31, 2026, appreciation in the investment could be excluded when ultimately disposed of.
Final Thoughts
The deferred gain will be taxed in 2026, and no further deferral is available. However, thoughtful advance planning can help manage and mitigate the impact.
Rollin Groseclose, CPA, CGMA
Rollin Groseclose, CPA, CGMA is a DMJPS PLLC Partner and the Director of Tax Services. Rollin is responsible for coordinating the firm’s tax services for clients, both businesses and individuals, and he helps the firm stay up to date on the latest tax developments. He has significant expertise in the areas of tax and business advisory services and focuses his energies on manufacturing and distribution, construction and real estate development, and hospitality. His expertise is also extensive with clients that have multi-state and international activities.