Opportunity Zone Investors: The Tax Bill You May Have Forgotten About

Hello, I'm Kevin Forget, tax manager with Brown Edwards Company, based in our Charleston, West Virginia office. I recently sat down with Corbin Rice, our tax director, for a Q&A on Qualified Opportunity Zone investments, and why now is the time to get in touch with your CPA about them. Here's a recap of what we covered.

Why Are We Talking About This Now?

Corbin asked me why, if someone invested in a qualified opportunity fund years ago, we're bringing it up now. It's a great question, because many Opportunity Zone investors are approaching a major tax event. They may not have been reminded about it, may have forgotten, or it simply hasn't been brought back to their attention. The original gain that was deferred when you invested in a qualified opportunity fund generally becomes taxable on December 31, 2026, unless it was already recognized earlier due to a disposition or other inclusion event.

Do I Have to Sell My Investment?

No, not at all. In fact, many investors will continue to hold that investment. The challenge is that the deferred gain can become taxable now, even though the investment itself hasn't been sold.

Could I Owe Tax Without Receiving Any Cash?

Unfortunately, that is probably the biggest surprise for investors in these funds. The tax recognition event does not necessarily create any cash. You may owe federal and state income taxes on the deferred gain while continuing to hold that investment, and that creates a major cash planning issue for a lot of investors.

How Much Gain Will I Need to Plan For?

Every investor's result is going to be drastically different. Generally speaking, the gain equals the lesser of the deferred gain originally invested in the fund, or the fair market value of the fund's interest less the basis of that interest. So, the answer depends on a variety of things:

• The amount of gain you originally deferred
• Your basis in the investment
• The current market value of the opportunity fund investment
• Whether any basis step-ups were received under the original rules

The question really becomes: do you know the answers to those considerations? That's exactly why contacting your advisor and doing it in a timely manner matters so much, so you can react to the consequences for 2026.

Does a Drop in Value Help?

Potentially, yes. Under the original zone rules, the recognized gain may be limited based on the fair market value of the investment. Investors with underperforming funds may recognize less gain than originally deferred, although this will vary for certain taxpayers depending on a multitude of factors, such as their basis, the liabilities of the fund, prior distributions, and several other factors.

What Should Investors Do Before December 31, 2026?

At a high level, hopefully your CPA or your firm has already contacted you about these investments. If they haven't, give them a call as soon as you can. We at Brown Edwards would generally recommend:

• Estimating the expected gain that will be recognized before year end
• Calculating the potential federal and state tax liabilities
• Identifying available capital loss carryovers to offset some of the gain
• Reviewing charitable giving strategies, which can also offset the gain
• Evaluating liquidity and cash needs to pay the expected tax bill
• In some scenarios, obtaining current valuations of the Opportunity Zone investment when appropriate

Is There Still Time to Plan?

We're approaching the middle of November, right in tax planning season, so Corbin asked whether there's still time to implement any of these planning opportunities. For most investors, the answer is yes, but they really need to get a jump on this and have a conversation with their advisor. While the original deferral period is ending, there may still be opportunities to manage the resulting tax burden, either through capital loss harvesting, charitable planning, estimated tax planning, and in some scenarios, valuation analysis of the fund.

The Biggest Mistake Investors Make

In my opinion, the largest mistake is thinking that the tax bill is going to be funded by the investment. The tax bill is going to come due before any liquidity event occurs. Investors should understand right now how much gain is going to be recognized, how much tax could be due, and where that cash is going to come from.

The Big Takeaway

I think the biggest takeaway is that most of your tax, probably deferred around 10 years ago, was deferred, not eliminated. For a lot of opportunity investors, December 31, 2026 is going to represent the end of a nearly decade-long deferral period, and a lot of them may have even forgotten they did the gain deferral. The best time to plan is before December 31, 2026, when this tax bill is going to become due right after.

Three Questions Every Opportunity Zone Investor Should Answer Today

Investors should either have already started a conversation to get the answers to these questions, or they need to reach out to their CPA. And if for some reason their CPA hasn't reached out to them, call Brown Edwards. We can jump right into this. We have a team of knowledgeable folks on Opportunity Zone investments. The three major questions are:

• How much gain will I recognize in 2026?
• How much tax will I owe from that gain?
• Where is my cash going to come from to pay for it?

Can I Roll This Into a New Opportunity Zone?

One of the things Corbin mentioned we're getting questions about from clients is whether this can be rolled over into the new Opportunity Zone. The answer is no. That is my understanding, as well. There were several rules that came out of the One Big Beautiful Bill Act in 2025 that require a good conversation with your CPA to further your knowledge on that regard.

The Time to Plan Is Now

If you don't already know the answers to these questions, now's the time to start planning. Call Brown Edwards today. Both Corbin and I are available, our contact information is available, and we're both on LinkedIn. Thanks so much.