 Some high-earning investors will soon owe taxes on years of deferred capital gains |
Source |
American Shipper |
Post Date |
08/07/2026 |
|
Key Points
? Investors have been able to put realized capital gains into Qualified Opportunity Funds and defer taxation until the of 2026.
? Early investors ?those who got in by the of 2019 or 2021 ?were also eligible for a 15% or 10% step-up in basis, respectively, on those gains, which means a lower tax bill.
? The next round of designated Opportunity Zones will take effect in 2027, at which point the tax benefits will change.
Some high-earning investors who deferred capital gains taxes through a special set of funds will soon have a tax bill coming due.
Authorized by the Tax Cuts and Jobs Act of 2017, Opportunity Zones are economically distressed communities nominated by states and certified by the Treasury Department. To encourage investment in so-called Qualified Opportunity Funds ?d to invest in those specified areas ?Congress included several tax incentives related to capital gains.
For starters, investors who remain in the fund for 10 years generally won? owe taxes on any gains earned on their investment. Additionally, investors who put realized capital gains from another investment in the fund have been able to defer paying taxes on that money. Investors who got in early enough also could reduce the amount of those deferred gains that would ultimately be taxed.
The of this year marks the close of the deferral period ?and the aggregate value of those deferred gains was $75 billion at the of 2024, according to a new working paper from the Treasury Department? Office of Tax Analysis.
?egardless of when from 2018 to present investors have deferred gains ... the deferral period will on Dec. 31, 2026, making all the gains taxable as of that date,?said Jason Watkins, a partner with accounting firm Novogradac & Co. and an expert in Opportunity Zones.
Opportunity Zone investors skew wealthier
There were about 12,800 Qualified Opportunity Funds in existence as of the of 2024, with roughly 41,000 investors in them, according to the Treasury research. The funds can invest in a variety of projects such as new housing, a property upgrade, a startup business or any other qualifying local initiative.
About 85% of the investors are individuals; the remainder are corporations, according to the research. The typical individual investor had adjusted gross income of $738,000 in 2024.
Capital gains taxes apply to profits taken from appreciated investments, and the tax rate deps on how long the investor has owned the asset. For those held longer than one year, the gains are considered long-term and taxed at rates of 0%, 15% or 20%, deping on the taxpayer? income. Short-term gains ?profits on investments held for a year or less ?are taxed as ordinary income.
Investors who got in on a Qualified Opportunity Fund by the of 2019 using realized capital gains not only were able to defer taxes on those gains until the of this year ?assuming they haven? already cashed out or otherwise lost eligibility ?but they also are able to get a 15% step-up in basis on the deferred gains. That means 85% of the deferred gains will be taxed instead of 100%.
Investors who were in by the of 2021 are eligible for a 10% basis step-up. Those who missed those deadlines get no extra benefit beyond deferring the taxation of their invested gains.
?opefully they?e planned for it and realize they?l owe taxes on these gains,?said Ryan Firth, a certified financial planner and certified public accountant based in Bellaire, Texas. ?nd hopefully they?e set aside money to be able to pay the taxes.?
Some funds also may have provided liquidity to investors to cover the taxes through debt-financing or other distributions, Watkins said. While the benefit of deferring gains is ing, the big payoff for investors hasn? happened yet ?tax-free gains on their investment after a decade of holding on to it ?so most are likely to remain invested after this year, he said.
? expect few investors to cash out to cover taxes as achieving a 10-year hold unlocks the most valuable of the [incentives], which is a potential tax-free exit,?Watkins said.
Some of the tax benefits will change as of 2027.
Rural investments get boosted tax incentives
President Donald Trump? ?ig beautiful bill,?enacted last summer, made Opportunity Zones permanent. The legislation calls for new zones to be designated every 10 years, with the next round of nominations currently underway and set to take effect Jan. 1, 2027, according to the Economic Innovation Group, the think tank that hatched the idea for these funds.
Instead of at least one of the tax benefits being based on the timing of an investment in the fund, all investors will be entitled to a five-year capital gains deferral, at which point they? get a 10% step-up in basis.
?ermanency with both a five-year deferral and a 10% basis step-up available regardless of when investors make their investments provides investors with more certainty,?Watkins said.
Additionally, investing in funds focused on rural areas comes with an extra tax benefit ?those investors would get a 30% step-up in basis on their originally deferred gains after five years, Watkins said.
|
|
|
|
