As we head into the middle of 2025, it is a good time to evaluate the tax implications of investments in Qualified Opportunity Funds (QOFs).
Created as part of the Tax Cuts and Jobs Act of 2017, QOFs offered a way for taxpayers to reinvest realized capital gains into a fund. The funds invested primarily in real estate in designated zones throughout the country. This reinvestment generated an opportunity for tax deferral on those realized gains.
However, the QOF deferral provision is set to expire on December 31, 2026. All taxpayers who participated in these investments need to be mindful of the looming deadlines.
What to Know
Deferral Expiration
The ability to defer capital gains taxes will end on December 31, 2026. After this date, any deferred gains will be subject to taxation, regardless of the sale or status of the QOF investment.
Tax Implications
Capital gains deferred into QOFs will be taxable in 2026. After the deferral provision ends on December 31, 2026, no additional deferrals will be available for future investments.
Continued Benefits
Investors will still be eligible for the 10-year capital gains exclusion on post-investment appreciation in the QOF, provided the investment is held for at least 10 years. However, the initial deferral benefit expires in 2026.
Recommended Actions
Review QOF Investments
Ensure you are aware of any QOF holdings that may be impacted by the 2026 deadline.
Evaluate QOF Basis Adjustments
Evaluate all QOF investments for potential basis step-up for those investments held at least 5 years.
Plan for Potential Tax Liabilities
You may need to assess the liquidity or other tax planning strategies to manage the tax liability triggered in 2026.
State Tax Adjustments
Ensure that the basis accounting on the state tax side has been handled separately from that of federal.
Monitor Legislative Updates
Continue to track any developments in tax policy that may affect this timeline.
Next Steps as the QOF Deferral Window Closes
As the 2026 deadline for QOF tax deferral approaches, investors must take proactive steps to stay informed and to understand and prepare for the resulting tax liabilities. Please feel free to reach out to any of our team members for further clarification or assistance in assessing the impact of this QOF deferral expiration.