Taxpayers may have previously deferred recognition of both short-term and long-term capital gains by timely reinvesting in qualifying Opportunity Zone (“OZ”) investments. Unfortunately, the time is coming to pay the piper.

The purpose of this communication is not to revisit the OZ rules, but to remind tax professionals and taxpayers that December 31, 2026 (a date that is fast approaching), is the date on which the remaining deferred gain on one’s OZ investment will be recognized. On that date, taxpayers will recognize the lesser of (i) the remaining deferred gain, or (ii) the gain that would result if the investment were deemed sold for its fair market value on December 31, 2026. In determining the gain that must be recognized, taxpayers will take into account any basis increases: 10% of the deferred gain for qualified investments held for at least five years plus an additional 5% of the deferred gain for qualified investments held for at least seven years, as of December 31, 2026.

This means that a calendar-year taxpayer who still holds the OZ investment on December 31, 2026, will recognize income on its 2026 tax return, even though the investment has not been sold or exchanged (and no cash from the investment is received to pay the tax). In many cases, the recognized gain will be substantial and should be factored into the taxpayer’s 2026 financial planning.

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