The end of 2026 will arrive faster than many Opportunity Zone investors expect—and with it, the mandatory recognition of previously deferred capital gains. Under current law, taxpayers who reinvested eligible gains into a Qualified Opportunity Fund (QOF) must recognize those deferred gains no later than December 31, 2026. This applies regardless of when the original investment was made, making the coming year a critical period for proactive planning.
As that inclusion date approaches, investors face a potentially significant tax liability—often without corresponding liquidity, since the investment may still be held for the purpose of achieving the program’s 10‑year exclusion benefit. As a result, there is often a need for strategic planning to reduce or offset this inclusion amount before it hits tax returns in 2026 and tax bills in 2027.
Below, we outline three planning techniques that may help mitigate the impact of the upcoming inclusion event. Each involves nuance, and none applies universally—another reason early conversations with your Perkins advisor are essential.
1. Tax Loss Harvesting: Coordinate Early With Your Financial Advisor
One widely discussed strategy for managing the 2026 gain recognition is tax loss harvesting. Losses realized in 2026 may offset the capital gain recognized from your QOF investment, reducing your taxable income for that year. Advisors emphasize harvesting losses in the same year as the inclusion event, since the deferred gain will be recognized as a 2026 tax item, with payment generally due in April 2027.
This is a conversation that should begin sooner rather than later. Asset mixes, market conditions, and portfolio strategy all dictate whether tax loss harvesting is viable—and whether opportunities exist to realize losses without disrupting long‑term investment goals.
2. Cost Segregation Studies on Underlying QOF Real Estate
For QOFs that invest directly in real estate, cost segregation studies may help generate additional depreciation deductions. These deductions can potentially offset taxable income recognized within the fund, thereby improving after‑tax returns or reducing taxable income flowing to investors.
While depreciation deductions at the fund level do not directly offset the investor’s 2026 deferred gain recognition, they can meaningfully affect the overall economic picture. Determining whether cost segregation is an effective strategy is nuanced and requires analysis both of the Fund level, as well as investor profile.
3. Business or Asset Valuations: Leveraging the “Lesser Of” Rule
One of the most nuanced planning opportunities relates to how the gain inclusion amount is calculated. By statute, investors recognize the lesser of:
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The amount of previously deferred gain, or
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The fair market value (FMV) of their QOF interest on December 31, 2026.
If the value of a QOF interest has declined since the original investment—as may be the case in certain real estate markets—this creates a possible opportunity to reduce the taxable inclusion amount. While there is not yet specific guidance, it is expected that determining the FMV of a QOF interest will require a business valuation, especially in circumstances where the FMV can reasonably be argued to be below the deferred gain.
Perkins’ Business Valuation Services can help investors assess the fair market value of their QOF interests with defensible, professional appraisals. Working with our experts ensures you have the data needed to support year-end reporting and explore potential tax planning strategies.
It’s important to emphasize that IRS guidance here is limited, and the appropriateness of a valuation approach will depend heavily on the facts and circumstances.
The Bottom Line: Planning Now Means More Options Later
Every investor’s situation is different. Each of the strategies above—tax loss harvesting, cost segregation, and FMV‑based valuation—comes with meaningful nuance. Some may fit your facts perfectly, while others may not apply at all. But what’s clear is this:
The earlier you start working with your Perkins team, the more tools remain available to help you manage the December 31, 2026 inclusion event.
Whether you invested in 2018 or 2026, the clock is ticking toward the end of the deferral period. Let’s put a plan in place now to help reduce the tax impact later.