The Qualified Opportunity Zone Program (QOZ) allows investors to “do good” by putting their capital gains into economically challenged areas. The program, introduced in 2017, also offers various tax benefits to QOZ investors. One of these is the step-up in basis, which ended in late 2021.
Another potential goodie is tax deferral. The tax deferral benefit allows investors to put their capital gains into a Qualified Opportunity Fund (QOF). This move, in turn, will enable investors to potentially defer the generated taxes on those gains.
But the Opportunity Zone program will eventually come to an end. This will also mean the end of the investment deferral period. Investors should be prepared for this deadline because it could mean an increase in the tax bill.
According to rules issued by the IRS, investors can defer taxes on eligible gains until the earlier of these two:
If someone wants to invest their qualified gains into a QOF, they could defer taxes on those gains for up to another three years as long as the QOF remains active. But, once the deadlines mentioned above occur, the investor must pay taxes on the deferred gains.
The IRS defines QOZ “eligible gains” as capital gains and qualified 1231 gains that are recognized for income tax purposes before Jan. 1, 2027.
There’s been frequent talk about extending the program from its current end date. To that end, various members of Congress continue to introduce Opportunity Zone legislation to extend the program and encourage more investments into areas that would benefit from economic growth.
One of these is the Opportunity Zones Transparency, Extension and Improvement Act, which would extend the incentive by two years. This would mark the program’s end date as Dec. 31, 2028.
But to date, none of the legislation has passed. Because of this, it’s safe to assume that the deferral period will conclude at the end of 2026. But QOF investors should keep an eye on the calendar and news coming from Washington, DC, to ensure they’re prepared for an extension or the QOZ program’s conclusion.
It’s also good for QOF investors to work with experienced tax advisors. This helps ensure that a QOZ strategy makes sense from an investment and tax viewpoint.