The offer, written into the 2017 tax law, was generous: move a capital gain into a project in a designated low-income area, and the tax on that old gain could wait until Dec. 31, 2026. Some investors have been waiting since 2018. Now the date is close, and it doesn’t care whether anything was sold; on Dec. 31, those long-deferred gains count as taxable income for 2026, the Journal’s Richard Rubin reports in Wednesday’s Personal Journal. For many, there’s no avoiding a sizable 2026 tax bill.
Congress sweetened the deal with discounts for money that stayed in at least five years, plus a bigger prize for patience: hold an Opportunity Zone investment for 10 years, and gains on the investment itself aren’t subject to capital-gains tax. Tens of thousands of investors, mostly high earners, signed on, and $75 billion of deferred gains went into the zones through 2024, per the Treasury; the Joint Committee on Taxation’s estimates imply a one-time revenue bump of about $29 billion. The record on the ground is mixed. Officials tout a revitalized downtown in Erie, Pa., and affordable housing in Charleston, S.C., while analyses find the money clustered in real estate and in neighborhoods already poised for development. Congress made the program permanent last year, and states are drawing a new map of zones for money invested starting next year.
Singles, not home runs
For the original investors, waiting mostly paid. The tax is figured in nominal dollars, and prices surged after the pandemic, so the bill is lighter in real terms than it would’ve been in 2019, and a proposal to lift the top capital-gains rate to 43.4% from 23.8% didn’t advance. The problem is cash: some investors planned to pay from project refinancings that slowed as rates rose and rental markets struggled, and RSM’s Christian Wood says some clients only recently mentioned their zone holdings. So advisers are harvesting losses, weighing earlier charitable gifts and ordering fair-market appraisals, since the law lets the deferred gain shrink if the investment’s worth less than what went in. As PKF O’Connor Davies partner Alan Kufeld put it, “There is no home run.”
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A deferred tax is still a debt; it just doesn’t mail a monthly statement (M5, cash flow). If you hold a zone fund, get the numbers now — the deferred gain, any holding-period discount, today’s appraised value — and set the cash aside, because the bill comes due with the 2026 return next spring whether or not the fund has paid you anything. Ask your preparer about estimated payments, too, so a year-end income bump doesn’t become an underpayment penalty. And there’s a time-value lesson here (M3): postponing a tax is an interest-free loan from the Treasury, and inflation made this one cheaper to repay.
The subtler call is the one the Journal flags. Selling an underwater stake books a loss against the deferred gain, but it also forfeits the 10-year tax-free upside, which gives investors a reason to keep potential winners. Harvesting losses elsewhere and getting the appraisal come first; a one-year bill shouldn’t decide a ten-year position. Charitable gifts can help, though a deduction usually does more against wages or business income taxed up to 37% than against lower-taxed gains.