Key Takeaways
- Current Qualified Opportunity Zone (QOZ) rules generally require deferred gain recognition by Dec. 31, 2026. New 2027 rules add rolling deferrals and basis increases for eligible investments.
- Tax-loss harvesting can offset capital gains and improve tax efficiency. Volatile markets may create loss-capture opportunities while preserving diversification.
- Internal Revenue Code (IRC) Section 1031 exchanges and exchange funds can defer capital gains, support diversification and reduce immediate tax liability.
As taxpayers begin planning for their 2026 tax liquidity needs, capital gain planning is becoming increasingly important for investors, business owners, fund managers and closely held enterprises anticipating liquidity events. With strong market performance and continued market volatility, and the mandatory gain inclusion of deferred Qualified Opportunity Zone (QOZ) gains on December 31, 2026, taxpayers should evaluate strategies designed to manage taxable capital gains before it is too late.
A coordinated approach involving tax-loss harvesting, strategic use of IRC Section 1031 exchanges, QOZs and exchange funds may provide significant long-term tax efficiencies when implemented proactively.
Qualified Opportunity Zones: New Planning Opportunities Emerging for 2027
Under current law, taxpayers who invested eligible gains into Qualified Opportunity Funds (QOFs) generally must recognize deferred gains on December 31, 2026, unless recognized earlier through an “inclusion” or disposition event. Taxpayers should closely review QOF funding dates to determine their basis step-up, if any.
Although the original 10% and 15% basis step-up incentives are no longer available for most new investments, QOZ investments continue to offer meaningful long-term tax benefits, including potential exclusion of post-investment appreciation if held for at least 10 years.
Under the enactment of the One Big Beautiful Bill Act, a new Opportunity Zone (OZ) framework will apply to investments made beginning January 1, 2027, introducing a permanent OZ regime that includes a rolling five-year gain deferral period, a 10% basis increase for standard QOFs and an enhanced 30% basis increase for certain qualifying rural funds.
As taxpayers prepare for the transition from the current OZ rules to the 2027 regime, careful attention should be given to the timing of gain recognition events in 2026 to ensure eligibility for reinvestment under the new regime within the applicable 180-day window. Considerations may include timing asset sales during the latter half of 2026, leveraging partnership K-1 reporting rules or contributing appreciated assets to flow-through entities prior to disposition, to potentially extend reinvestment timing into 2027.
Tax-Loss Harvesting: Using Market Volatility Strategically
Tax-loss harvesting is one of the most effective tools for reducing short-term and long-term capital gain exposure. Sophisticated investors are continuously evaluating portfolio rebalancing opportunities and timing considerations surrounding the wash sale rules (which limit the ability to use losses when stock is repurchased in certain time periods after sale).
In addition, several banks and brokerage firms offer separately managed tax-loss harvesting accounts, including strategies offered by high-end quantitative asset managers. These accounts have become increasingly popular among high-net-worth investors seeking tax efficiency. These accounts use investment strategies designed to capture tax capital or ordinary losses throughout the year while maintaining the portfolio’s overall investment objectives, market exposure and diversification. Potential benefits often include the generation of capital losses to offset current or future capital gains, enhanced after-tax portfolio returns, improved transition management for concentrated positions and long-term tax asset accumulation through loss carryforwards. In volatile markets, these strategies often create meaningful tax alpha by converting short-term market dislocations into usable tax assets without substantially altering overall investment allocations.
PKF O’Connor Davies Observation: Please ensure you fully understand the applicable fees and associated risks related to this type of strategy.
Section 1031 Exchanges: Continued Deferral for Real Estate Investors
For real estate investors, Section 1031 like-kind exchanges remain a significant capital gain deferral strategy, allowing more capital to remain invested as your cash from the sale is not diluted by capital gains taxes.
Because Section 1031 transactions involve strict timing, identification of new investment properties and critical documentation requirements, early coordination among tax advisors, legal counsel, qualified intermediaries and lenders is critical. This is especially true if the property is held in a flow-through entity, which can require additional structuring depending on the goals of the owners. Under the current tax law, if the property is held until death, heirs may receive a step-up in basis, potentially eliminating deferred capital gains taxes.
Exchange Funds: Diversification Without Immediate Gain Recognition
Exchange funds are becoming increasingly attractive to company founders, corporate executives and investors with large single-concentrated positions in highly appreciated stock.
These structures generally allow investors to contribute appreciated securities into a pooled investment vehicle in exchange for a diversified portfolio without immediate taxable recognition.
Potential benefits include:
- Diversification of concentrated holdings
- Deferral of embedded capital gains
- Reduced single-stock risk exposure
- Provides an alternative to an outright stock sale that would otherwise create a substantial immediate tax liability
Please note that exchange funds often involve long holding periods (generally 7 years), illiquidity, accreditation requirements and complex partnership reporting considerations.
PKF O’Connor Davies Observation
Individuals should keep in mind that exchange fund investments are generally illiquid, with limited ability to access contributed capital during the holding period. Additionally, investors relinquish direct control over the contributed securities and the quality and performance of the securities ultimately distributed at the end of the typical seven-year holding period will depend on the overall assets contributed to the specific exchange fund.
Integrated Planning Will Be Critical
As 2026 continues to move along, capital gain planning should not occur in isolation. Taxpayers frequently achieve better outcomes through coordinated strategies often involving several of the items discussed above. For example, a taxpayer facing deferred QOZ gain recognition in 2026 may simultaneously harvest investment losses, complete a Section 1031 exchange and contribute appreciated securities to an exchange fund as part of a broader tax efficiency strategy.
Final Thoughts
With the stock market reaching new highs, the 2026 tax year is shaping up to be a critical period for capital gain planning. Investors and business owners should begin evaluating planning opportunities now rather than waiting until deferred gains become immediately taxable.
While future legislative developments remain uncertain, proactive planning around QOZ investments, tax-loss harvesting, Section 1031 exchanges and exchange funds may provide meaningful opportunities to defer, reduce or potentially eliminate portions of taxable capital gains.
Early modeling, coordination among advisors and a strong understanding of the tax rules will likely be essential components of effective planning as taxpayers navigate an increasingly complex capital gains environment.
Contact Us
Our professionals are available to assist you with tailored guidance. For specific inquiries regarding the above, please reach out to your PKF O’Connor Davies service team or:
Alan S. Kufeld, CPA
Partner
akufeld@pkfod.com | 646.449.6319
Ilyana Ezhaghi, CPA
Partner
iezhaghi@pkfod.com | 332.910.7945