Episode Details

The Tax Cliff

Episode 27 Published 2 months, 1 week ago

Treasury working paper: $75B in deferred capital gains outstanding across ~12,800 QOFs and ~41,000 investors as of end of 2024
Typical OZ investor: $738K adjusted gross income; 85% are individuals
Hard deadline: all deferred gains recognized by Dec. 31, 2026; tax due April 15, 2027 regardless of whether the fund asset is sold
Basis step-ups: 15% for investments held 7+ years (in by Dec. 31, 2019); 10% for 5+ years (in by Dec. 31, 2021); post-2021 investments get no step-up
Recognition formula: lesser of remaining deferred gain or FMV of fund interest on Dec. 31, 2026, minus any basis step-up
Partnership trap: modified passthrough formula ignores net FMV; investors may recognize full deferred gain even if fund interest is underwater due to debt allocations and prior distributions
Tax rates: up to 20% federal LTCG + 3.8% NIIT = 23.8%; state non-conformity in CA and NY may create additional liability
10-year hold benefit survives: appreciation on QOF investment after 2026 remains tax-free if held 10 years
One Big Beautiful Bill Act (July 2025) made OZs permanent; new framework effective Jan. 1, 2027: 5-year deferral, 10% step-up, rural funds eligible for 30% step-up
IRS Notice 2026-40 (June 2026): original deferred gains cannot be re-deferred into new QOFs under the 2027 regime