For professionals in the Bay Area who have recently sold a business, diversified out of a concentrated stock position, or realized a significant capital gain, the question of what to do next with that capital is one of the first questions. One strategy worth understanding is investing in a Qualified Opportunity Zone fund. 2026 is a particularly relevant year to be paying attention to how this program works.

What Is a Qualified Opportunity Zone Fund?

A Qualified Opportunity Zone fund, or QOF, is a type of investment vehicle that directs private capital into economically distressed communities designated by the federal government. The program was created as part of the Tax Cuts and Jobs Act of 2017 and was made permanent in 2025. The core idea is straightforward: instead of paying tax on a capital gain right away, an investor can reinvest some or all of that gain into a QOF within 180 days of the sale and defer the tax bill. The investment must be made as an ownership stake in the fund rather than a loan, and the tax deferral election is made when filing that year’s tax return.

What Are the Potential Tax Benefits of an QOF?

The most immediate benefit is pushing out when you owe tax on the gain. Rather than writing a check to the IRS in the year the gain is realized, an investor who meets the 180-day deadline may defer that payment until the investment is sold or a mandatory recognition date is triggered. Similarly, investors who roll capital gains into a QOF may receive a step-up in basis on the original investment. The original QOF legislation gave early investors a 15% step up in basis (which dropped to 10% in 2020 and then went away starting in 2022). We may see a similar step-up in cost basis once the rules come out this year for the refreshed version of the QOF program thanks to the One Big Beautiful Bill Act (OBBBA) passed on July 4, 2025.

Regarding the delay in the recognition date of the original gain, one strategy to consider is the deliberate harvesting of capital losses during this deferral period time. If managed correctly, an investor could diversify out of a concentrated stock position, roll a portion of the gain into a QOF and for the remaining sale proceeds, utilize a direct indexing strategy to magnify the capital losses so that once the taxes are recognized, you’ve accumulated sufficient losses to offset the gains! The recent popularity of long-short direct indexing strategies only makes this strategy more viable.

The longer-term benefit of QOFs is what tends to generate the most interest: investors who hold a QOF investment for at least ten years may be eligible to pay no federal tax on any appreciation the fund generates during that time. In other words, the original gain eventually becomes taxable, but any growth the investment produces inside the fund over a decade or more could be excluded from federal income entirely.

When added up, the tax benefits of the QOF program could feasibly add more than 1% in incremental annualized returns on top of the performance of the underlying QOF.

What Should California Residents Know Before Considering a QOF Strategy?

This is an important caveat for Bay Area investors. California does not follow the federal QOZ rules, which means the state will still tax your capital gain in the year you realize it, even if you defer it federally. A California resident deferring a large gain into a QOF would still owe California state income tax on that gain in the year of the sale, at a rate that can reach 13.3% since California taxes capital gains as ordinary income. The federal 10-year appreciation exclusion also does not apply at the state level. This does not make the strategy off the table for California residents, but it does change the math meaningfully and is one of the more important factors to run through with your advisor before committing.

What Is Changing in 2026 and Why Does It Matter?

2026 is a significant year for anyone who has previously invested in a QOF. Under the original program, any gains that were deferred between 2018 and 2026 must be recognized and taxed by December 31, 2026, whether or not the investment has been sold. For investors holding meaningful deferred gains, this is a real planning deadline that warrants attention now. Steps worth considering before year end may include:

• Harvesting capital losses elsewhere in the portfolio to help offset the gain coming due
• Coordinating any planned charitable giving before the recognition date
• Getting a current valuation of the QOF interest, since the taxable amount is limited to the lesser of the original gain or the fund’s current fair market value. There may be an opportunity to take a liquidity discount on the QOF investment but requires carefully consultation with a tax professional.

For those thinking about a new QOF investment going forward, the program was made permanent in 2025 and now operates on a rolling five-year deferral from the date of investment, removing the hard deadline that applied under the original rules.

What Are the Key Tradeoffs of QOF Investments?

The most important thing to understand about QOF investments is that your money is generally locked up for the duration of the holding period. There is no easy way to exit early if your financial situation changes, which matters a great deal for professionals who may also have unvested equity, near-term liquidity needs, or other illiquid assets on their balance sheet. Beyond the liquidity constraint, QOF investments are typically concentrated in real estate projects or operating businesses within specific designated zones, which is a very different risk profile from a diversified investment portfolio. Choosing the right fund manager and understanding what the fund actually owns before committing capital is essential, and the tax benefits alone should never be the primary reason to make an investment.

Is a QOF Investment Strategy Worth Exploring for Your Situation?

For investors with a substantial recent capital gain, a long time horizon, and the financial flexibility to commit capital for an extended period, a QOF investment may be worth a closer look as part of a broader tax and financial plan. California residents in particular should work through the state tax implications carefully before moving forward. If you have recently realized a significant gain (or contemplating doing so) and are wondering what your options look like, reach out to our team.

Tony Blagrove, CFA, CFP
Founder, CEO
Direct: (650) 397.2395
Tony.Blagrove@TravekaWealth.com

This material is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product or services. The content of this material is provided solely for your personal use and shall not be deemed to provide access to any particular transaction or investment opportunity. Traveka Wealth, LLC (“Traveka”) does not intend the information in this material to be investment advice, and the information presented in this material should not be relied upon to make an investment decision. Any third-party information contained herein was prepared by sources deemed to be reliable but is not guaranteed.  All opinions expressed by the participants are solely opinions and should not be relied upon as potential or actual results.

Certain of the information contained herein has been obtained from third- party sources and has not been independently verified. It is made available on an “as is” basis without warranty. Any strategies or investment programs described in this presentation are provided for educational purposes only and are not necessarily indicative of securities offered for sale or private placement offerings available to any investor. 

The views expressed in the referenced materials are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance; actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Historical performance results for investment indices and/or product benchmarks have been provided for general comparison purposes only, and do not include the charges that might be incurred in an actual portfolio, such as transaction and/or custodial charges, investment management fees, or the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. If performance fees are stated, the performance returns are net of fees which include expense ratios and other fees of the underlying investments but does not include Traveka’s advisory fees. Traveka’s advisory fee will reduce the returns shown in this document.