Tens of thousands of high-income investors who deferred capital gains into Opportunity Zones face a Dec. 31 deadline to include those gains in taxable income — a one-time federal revenue event estimated at $29 billion.
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Opportunity Zone investors face $29 billion tax bill by Dec. 31
Opportunity Zone investors must include long-deferred capital gains in taxable income by Dec. 31, a deadline that the Joint Committee on Taxation estimates will produce a one-time federal revenue bump of about $29 billion.
"There will be, I will imagine, a very sizable tax bill across OZ investors," said Jason Watkins, a partner at accounting firm Novogradac & Company.
Through 2024, $75 billion in deferred capital gains flowed into Opportunity Zones, according to the Treasury Department. The program, created in the 2017 GOP tax law, let investors delay taxes on old gains until Dec. 31, 2026, provided they put capital into projects in designated low-income areas. Congress also offered discounts for money held at least five years and full tax exemption on profits from projects held 10 years.
The ticking clock has set off a planning flurry as advisers help clients minimize the hit from ending deferrals that started as far back as 2018. Wealthy Americans are harvesting capital losses, considering accelerated charitable deductions, and analyzing whether their Opportunity Zone investments have declined in value. For many, significant payments for tax year 2026 are unavoidable.
The program's design rewarded patience. The U.S. taxes in nominal dollars, and inflation jumped after the pandemic — paying $1 million in taxes now is far cheaper than paying $1 million in 2019. The U.S. also kept tax rates flat. Former President Joe Biden proposed raising the top individual capital-gains rate to 43.4 percent from 23.8 percent, but that initiative failed to advance in Congress even when Democrats held full control.
"That rate risk was real and actually, whoever played that game won, because rates did stay flat," said Alan Kufeld, a partner at advisory firm PKF O'Connor Davies in New York.
The coming tax bill may surprise some. Christian Wood of accounting firm RSM said some clients hadn't mentioned until recently that they invested deferred capital gains into Opportunity Zones. They must pay even if they sell nothing now. "We're sort of discovering after the fact," he said.
In other cases, investors planned to pay taxes with money from Opportunity Zone projects. But that often depended on refinancings, which slowed because of higher interest rates and struggling rental-housing markets.
"Dec. 31 is going to be a day of reckoning for a lot of Opportunity Zone funds," said Jonathan Tower, founder and chief executive of Arctaris Impact Investors, which has projects in cities including Detroit and Baltimore. "We see all kinds of operators out there and we hear [of] investors who made a big investment, it was illiquid and now they have to pay more taxes."
Loss harvesting and appraisals trim the $29 billion hit
For those who owe, there are ways to lower looming tax payments. "You kind of have to hit a bunch of singles," Kufeld said. "There is no home run."
Capital losses can offset gains, putting a premium on loss-harvesting strategies that include selling underwater investments and using tax-aware funds designed to generate losses. The law also lets investors reduce deferred capital gains if their Opportunity Zone projects are worth less than the original investment, leading investors and fund managers to get struggling projects appraised at fair market value.
Ryan Tobias of Jackson Dearborn Partners, which had about $180 million of capital in 13 Opportunity Zone funds, said his firm was trying to determine values for some projects. Student-housing developments in zones fared well, he said, while Sunbelt rental housing has struggled.
People could also sell underwater Opportunity Zone investments to lock in capital losses that offset deferred gains, but that has a downside. Because Opportunity Zone investments held for 10 years are themselves free from capital-gains taxes, investors have incentives to hold on to potential winners.
"Smart investors have their eye on the 10-year benefit, and I think once a full decade passes, a full decade can absorb a lot of these shocks," said Jimmy Atkinson, founder of opportunityzones.com, a media and events company tracking the industry.
In reducing tax bills, charitable deductions can be useful but inefficient. Taxpayers typically prefer to pair those deductions with wages and business profits taxed up to 37 percent and not with lower-taxed capital gains. Still, investors who deferred short-term capital gains might benefit from accelerating charitable contributions into 2026, because those gains are taxed at ordinary-income rates.
State taxes present another complication. Some states, including California, didn't respect the original federal deferral and required state tax payments years ago. Others allowed deferrals, creating complications for people who have moved recently.
Analyses of Opportunity Zones found mixed success. Investment concentrated in real estate and in neighborhoods already on the cusp of development. Last year, Congress made the program permanent and boosted incentives for rural projects. States are picking new zones for investments that start next year.
The $29 billion revenue bump represents a significant one-time fiscal event for the federal government, recouping a large share of previously deferred taxes. For investors, the deadline crystallizes a bet made nearly a decade ago — one that, for many, will now come due regardless of whether their projects have performed as hoped.
This article is for informational purposes only and does not constitute investment, tax, or legal advice.
