If you deferred a capital gain by investing in a qualified opportunity fund before 2027, that deferral ends on December 31, 2026. Whatever deferred gain is left goes on your 2026 federal return. That is true even if you still hold the fund and it has not paid you a dollar. IRS Notice 2026-40, released June 18, 2026, confirms it. Investments made after 2026 run under new rules from the 2025 tax law.
Who this hits
You are in this group if you sold stock, a business, real estate, or anything else at a capital gain, then invested that gain in a qualified opportunity fund within 180 days and elected to defer it. Most of these investments were made from 2018 through 2026. The original statute set the deferral to end on the earlier of selling the fund interest or December 31, 2026. The 2025 law did not move that date for existing investments.
How much gets taxed
The amount included is the smaller of two numbers, minus your basis in the fund:
- the gain you deferred, or
- the fair market value of your fund interest on December 31, 2026.
Your basis for this purpose starts at zero. It goes up by 10% of the deferred gain if you have held the investment for at least 5 years, and by another 5% if you have held it for at least 7 years. The holding period is measured to December 31, 2026.
| When you invested | Basis increase | Share of deferred gain taxed (if value has held up) |
|---|---|---|
| 2019 or earlier | 15% | 85% |
| 2020 or 2021 | 10% | 90% |
| 2022 through 2026 | 0% | 100% |
A simple illustration, not a client result. You deferred a $500,000 gain in 2020. Your fund interest is worth $700,000 at the end of 2026. Your basis is $50,000 (10% of $500,000). You include $450,000, which is $500,000 minus $50,000. If the fund had instead fallen to $300,000, you would include $250,000, which is $300,000 minus $50,000.
The included gain keeps the character it had when you deferred it. A long-term gain in 2020 is a long-term gain in 2026, taxed at 2026 rates. That rule is in Treas. Reg. §1.1400Z2(a)-1(c)(1).
Paying a tax with no cash from the fund
The fund will not send you money to pay this. Plan for it now:
- Estimated tax. If your 2026 withholding and estimates cover the prior-year safe harbor under IRC §6654(d), which is 100% of your 2025 tax or 110% if your 2025 AGI was over $150,000, you can generally pay the rest by April 15, 2027 without an underpayment penalty. If not, the fourth-quarter estimate is due January 15, 2027.
- Offsets. Capital losses you realize in 2026 can offset the included gain, subject to the usual capital loss rules.
- The fund's year-end value. Ask the sponsor how it will report the December 31, 2026 value. That number drives the calculation if the fund has lost value.
You report the investment on Form 8997 each year you hold it, and the 2026 inclusion flows through Form 8949 and Schedule D.
Your 10-year benefit is still alive
Paying tax on the deferred gain does not end the investment. Notice 2026-40 says your deferral election stays in effect after the December 31, 2026 inclusion. If you hold the fund interest for at least 10 years, you can still elect to step its basis up to fair market value when you sell. That can make the appreciation inside the fund tax-free federally. The regulations protect that election for dispositions before January 1, 2048, even after the original zones expire.
One limit. The gain you include on December 31, 2026 cannot be deferred again by investing it in a new fund. The notice says so directly.
What changes for investments after December 31, 2026
The 2025 law, Public Law 119-21 §70421, made opportunity zones permanent with different rules for money invested on or after January 1, 2027:
- Rolling five-year deferral. Deferred gain is taxed at the earliest of selling the investment, another inclusion event, or five years after you invest.
- Basis step-up at five years. 10% of the deferred gain, or 30% for an investment in a qualified rural opportunity fund.
- 10-year exclusion, capped. The fair-market-value basis election is still available after 10 years, measured no later than 30 years after the investment.
- A new zone map. Zones designated under the new law start January 1, 2027 and last 10 years. Under Rev. Proc. 2026-14, governors nominate the tracts. The original zones expire December 31, 2028.
Property a fund buys after 2026 generally has to sit in a zone designated under the new rules. Notice 2026-40 gives limited exceptions for projects under a written plan adopted before 2027 and for ordinary replacements at existing properties. Check the current map for any deal you are considering.
The timing question for 2026 gains
If you realized a gain in 2026, you may not want to invest it before January 1. A fund investment made in late 2026 under the old rules gets almost no deferral, because the gain comes due on December 31, 2026 anyway.
Notice 2026-40 says a gain realized on, before, or after December 31, 2026 can be invested on or after January 1, 2027 and use the new rules, as long as the investment is made inside that gain's 180-day window. A gain realized in the second half of 2026 has a window that reaches into 2027. Gains passed through on a K-1 have their own start-date options under the regulations, so check those dates separately.
Opportunity zone or 1031 exchange?
They solve different problems. A 1031 exchange defers gain on real property you exchange for other like-kind real property, with a qualified intermediary holding the proceeds. An opportunity zone investment defers a capital gain from almost any kind of sale, and you invest only the gain, not the full sale price, into a fund. The fund then has to meet its own investment tests. If you sold real estate, run both paths before your deadlines start. See our 1031 exchange CPA page and who does what on a 1031: CPA, QI, or attorney.
California
California does not follow the federal opportunity zone deferral or exclusion. FTB instructions say California has no similar provisions, and that a gain already included for California in an earlier year is not included again. If California taxed your original gain in the year of the sale, the federal December 31, 2026 inclusion is generally a federal-only event on your California return. Expect the two returns to differ.
Checklist before year-end
- Pull your Form 8997 from the 2025 return and list each fund, date invested, and deferred gain.
- Ask each sponsor how it will value your interest as of December 31, 2026.
- Run the inclusion with the 10% or 15% basis increase where it applies.
- Check your safe harbor for estimated tax, and set aside cash for April 15, 2027.
- If you have a 2026 gain, check its 180-day window before investing in December.
Frequently asked questions
When is deferred opportunity zone gain taxed?
For qualified opportunity fund investments made before 2027, the remaining deferred gain is included in income on December 31, 2026, unless you sold the investment or had another inclusion event earlier. It goes on your 2026 federal return.
How do I calculate my 2026 opportunity zone inclusion?
Take the smaller of your deferred gain or the fair market value of your fund interest on December 31, 2026, and subtract your basis. Basis starts at zero, plus 10% of the deferred gain if held at least 5 years and another 5% if held at least 7 years.
Do I still get the 10-year opportunity zone exclusion after paying the 2026 tax?
Yes, if you keep the investment at least 10 years and meet the other requirements. Notice 2026-40 says the deferral election stays in effect after the 2026 inclusion, and the regulations protect the basis election for dispositions before January 1, 2048.
Can I invest a 2026 gain in an opportunity fund in 2027?
Yes, if the investment falls inside that gain's 180-day window. Notice 2026-40 says gain realized on or before December 31, 2026 can be invested on or after January 1, 2027 under the new rules.
What changes for opportunity zone investments after 2026?
Deferral lasts until the earliest of a sale, another inclusion event, or five years after the investment. The basis step-up at five years is 10%, or 30% for a qualified rural opportunity fund. The 10-year exclusion is capped at 30 years, and a new zone map takes effect January 1, 2027.
Does California tax opportunity zone gains in 2026?
California does not conform to the federal opportunity zone deferral, so it generally taxed the gain when the original sale happened. FTB instructions say not to include it again in a later year.
Talk it through with us
Bring your Form 8997, the fund statements, and the original sale details. We will run your December 31, 2026 number, check your estimated tax position, and compare the new 2027 rules with a 1031 if you have a fresh gain. LaviCPA does not sponsor or sell opportunity funds. Book a complimentary consultation.
LaviCPA is a Los Angeles CPA firm for real estate investors. Shawn Lavi, CPA, is the firm's principal. Elias Lavi, CPA, is its founder and co-owner.