Your Opportunity Zone Fund is About to Wake Up

July is the month I tell clients to stop ignoring the boring corner of their portfolio. Most of you have a few positions you haven't actively thought about since the year you bought them (a vintage private fund, an old insurance policy, a closed-end position that's just been sitting there). If you own an Opportunity Zone Fund from 2018, 2019, or 2020, that's the one we need to talk about this summer, because it's about to do something it has not done in five or six years. It's about to require active management.

Tick Tock

Here is what you bought back then: When you sold an asset and rolled the gain into a Qualified Opportunity Fund, you started two separate clocks. Most clients don't realize there are two clocks, and that is the entire reason this gets confusing.

Clock one tracks your original deferred gain. It started the day you sold whatever produced the capital gain in the first place - your business, your rental property, your stock position, whatever you owned before you knew the QOF existed. The IRS has been waiting since that day to tax that original gain. The QOF program lets you push it down the road. Under the statute, the road stops on December 31, 2026.

Clock two tracks how long you’ve held the QOF investment itself. It started the day you invested in the fund. When this clock hits ten years, you become eligible to elect a basis step-up to fair market value on the day you sell, permanently and completely excluding every dollar of appreciation in the fund from federal tax.

These two clocks measure two different gains. The original gain you rolled in, and the new gain the fund has grown for you. One clock is ending. The other one keeps running. The December 31, 2026, wall ends the first clock and has no effect on the second.

So, a 2020 investor pays tax on the original 2020 gain at the end of 2026, then keeps holding the same QOF interest for another four years to hit the ten-year mark in 2030, at which point a sale qualifies for the appreciation exclusion. Two tax events. Different gains. Different timelines.

Rollover?

The question every client eventually asks me: can I just roll my old QOF into a new 2027 fund and avoid the 2026 tax bill?

No. There is no rollover. The deferred gain clock is fixed by statute to stop on December 31, 2026, and Congress did not write a §1031-style provision to bridge the old program into the new one. Industry lobbyists asked. Sponsors asked. The answer was no. The two regimes do not connect. Everyone with deferred gain on the books recognizes that gain by year-end, full stop.

Which means the mid-year planning work for this position is real, and it needs to be addressed now.

Your Assignment

Three things to do this summer:

Get a year-end valuation in motion. If your QOF has lost value since you invested, the December 31, 2026, inclusion is capped at the fund's fair market value, not your original deferred gain. Suppose you rolled $1,000,000 into a QOF in 2020, and the fund is now worth $650,000. Your gain is capped at $650,000, but only if you can substantiate that $650,000 number. A simple sponsor email won't survive an audit. An independent third-party valuation will. If Composition Wealth placed you in this fund, this work is on us. And if you came in with the position from somewhere else, we could still help you track down the valuation if the fund has dropped.

Size the tax now, not in April. Once we have the valuation, we can project the inclusion amount and adjust your Q3 and Q4 estimated payments, so April doesn't bring a bad surprise. If you live in California, Massachusetts, North Carolina, Washington, or Mississippi, the state piece deserves its own conversation, as these states may have handled this differently than the IRS.

Confirm your ten-year exit plan is intact. Even after the December 2026 tax bill, the second clock keeps running. For most of you, that means another three to five years of holding to reach the ten-year mark. If you've been thinking about exiting early, this is the summer to model whether giving up the future appreciation exclusion makes sense. For most clients, it does not, as the exclusion is the entire economic reason the original investment penciled out.

We also need to discuss how the One Big Beautiful Bill Act, passed last summer, restructured Opportunity Zones into a permanent framework (QOZ 2.0) with a new map every ten years, a new rural fund category, and several changes that look better in the marketing materials than they do under the math. I have been watching the World Cup and the OZ 2.0 map nominations with roughly equal zeal this month, which I think makes me a well-rounded person and not, as my family suggests, simply two kinds of nerd. The new map is being drawn in real time. The Treasury is reviewing nominations now, with certifications later this year, and new zones going live January 1. If you're already getting pitched on 2027 funds, and several of you are, that's a conversation worth having before you commit capital.

For now, the mid-year work is the old fund. Loop in your advisor before Labor Day.

This is a column, not advice. Your advisor's office is where it becomes advice.

Composition Wealth, LLC ("Composition Wealth") is a registered investment adviser. Advisory services are offered only to clients or prospective clients where Composition Wealth and its representatives are properly licensed or exempt from licensure. This communication is for informational purposes only and should not be considered financial, tax, or legal advice. Please consult with your professional advisors before making any financial decisions.

Composition Wealth and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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