# The December 31, 2026 opportunity zone tax: how to calculate your inclusion and fill in Form 8997

Source: https://fundtaxes.com/blog/opportunity-zone-2026-inclusion-form-8997
Published: 2026-10-10 · Updated: 2026-10-10 · Publisher: FundTaxes

> **If you still hold a QOF investment made before 2027, the deferred gain is included in your income on December 31, 2026.** The amount is the lesser of the gain you deferred or the investment’s fair market value that day, minus your basis: 15% of the gain if you invested by December 31, 2019, 10% if by December 31, 2021, otherwise zero. You report it on your 2026 return and on Form 8997.

## Key takeaways

- The inclusion happens even if you do not sell. Plan cash for the tax, because QOF interests are usually illiquid.
- Step-ups depend only on when you invested: by the end of 2019 for 15%, by the end of 2021 for 10%.
- If the investment lost value, the fair-market-value cap limits what you include. Get a supportable valuation.
- The included gain keeps its original character (short-term stays short-term) and, per Notice 2026-40, cannot be deferred again.
- Your 10-year exclusion on the investment’s growth survives the inclusion.

## Who has an inclusion on December 31, 2026

Everyone who elected to defer a gain into a QOF under the original rules and still holds the investment at the end of 2026. Section 1400Z-2(b) ends every OZ 1.0 deferral on the earlier of an “inclusion event” (usually a sale) or December 31, 2026. Investors who already sold or had another inclusion event reported their gain then.

The rule applies to the investor, not the fund. If you invested through a partnership that itself made the QOF investment, the partnership computes the inclusion and passes it to you on your K-1.

## How the amount is calculated

1. **Start with the deferred gain still outstanding.** If you sold part of the investment earlier, only the remaining share counts.
2. **Compare it with fair market value.** Take the smaller of that gain and the fair market value of your QOF interest on December 31, 2026.
3. **Subtract your basis.** Your basis in the QOF interest starts at zero and rises by 10% of the deferred gain after five years of holding and by another 5% after seven. Because the deadline is December 31, 2026, that means 15% if you invested by December 31, 2019 and 10% if you invested by December 31, 2021.
4. **The result is your 2026 inclusion**, never less than zero.

### Three investors, side by side

|  | Invested Nov 2019 | Invested Aug 2021 | Invested Apr 2023 |
| --- | --- | --- | --- |
| Gain deferred | $2,000,000 | $900,000 | $1,500,000 |
| FMV on Dec 31, 2026 | $2,600,000 | $1,100,000 | $1,250,000 |
| Lesser of gain or FMV | $2,000,000 | $900,000 | $1,250,000 |
| Step-up (basis) | 15% = $300,000 | 10% = $90,000 | 0 |
| **2026 inclusion** | **$1,700,000** | **$810,000** | **$1,250,000** |

The 2023 investor’s fund fell below the original gain, so the fair-market-value cap saves $250,000 of income. Run your own numbers below.

> Interactive worksheet: enter the deferred gain, investment date, share still held, December 31, 2026 fair market value and your tax rate to calculate the 2026 inclusion, step-up and estimated federal tax. Use it at https://fundtaxes.com/blog/opportunity-zone-2026-inclusion-form-8997

## What goes on Form 8997

Form 8997, _Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments_, is filed with your return every year you hold a QOF investment. It tracks each investment from deferral to inclusion:

- **Part I:** QOF investments you held at the start of the year, with the deferred gain on each.
- **Part II:** new gains you deferred this year.
- **Part III:** investments you disposed of, and deferred gain you included, this year. For 2026 this is where the December 31 inclusion shows up.
- **Part IV:** investments still held at year end, with the remaining deferred gain.

The inclusion itself is reported as a capital gain on Form 8949 and Schedule D of your 2026 return, due April 15, 2027. Because the gain is recognized in 2026, it counts for 2026 estimated tax: if it is large, make a fourth-quarter estimated payment by January 15, 2027 or raise your withholding to avoid an underpayment penalty.

## Details that change the number

- **Character.** The included gain is the same kind of gain you deferred. A short-term gain deferred in 2019 is still short-term in 2026.
- **Valuation.** If you rely on the fair-market-value cap, use a defensible valuation of your interest as of December 31, 2026. The IRS can challenge it.
- **State tax.** Some states, California among them, never conformed to the deferral and taxed the gain when it was realized. Check before you double count.
- **No second deferral.** According to Notice 2026-40, the amount included on December 31, 2026 cannot be deferred again into another QOF.
- **The upside is intact.** Keep the investment 10 years and you can still elect to step its basis up to fair market value when you sell, so its appreciation is tax-free.

## Get the numbers ready now

Ask each fund for its expected December 31, 2026 valuation, confirm your investment dates and step-up, and model the tax with your preparer before the January estimate. Fund sponsors can produce every investor’s inclusion worksheet in [FundTaxes](https://fundtaxes.com/signup); individual investors can use the [free inclusion calculator](https://fundtaxes.com/tools/oz-inclusion-calculator).

## Frequently asked questions

### When is the tax on the 2026 opportunity zone inclusion due?

The gain is included on December 31, 2026 and reported on your 2026 return, due April 15, 2027. Because it is 2026 income, a large inclusion may call for a fourth-quarter estimated payment by January 15, 2027.

### Do I get the 15% step-up if I invested in 2020?

No. The extra 5% needs seven years of holding by December 31, 2026, so only investments made by December 31, 2019 qualify. Investments made in 2020 or 2021 get 10%; later investments get none.

### What if my opportunity zone fund lost value?

You include the smaller of the deferred gain or the fair market value of your investment on December 31, 2026, minus any step-up. A fund worth less than your deferred gain therefore reduces the inclusion.

### Is the included gain long-term or short-term?

It keeps the character of the gain you originally deferred. A long-term gain stays long-term, and a short-term gain stays short-term, no matter how long you held the QOF investment.

### How do I report the 2026 inclusion in tax software?

Report it as a capital gain on Form 8949 and Schedule D of your 2026 return and show it in Part III of Form 8997. Check the generated forms before filing; see the guide to reporting QOF investments.

### Do I still file Form 8997 after the inclusion?

Yes, for every year you hold the QOF investment. After 2026 the deferred-gain columns will be zero, but the form still tracks the investment until you sell it.

### Can I reinvest the 2026 inclusion amount in a new QOF?

Notice 2026-40 says the deferred gain included on December 31, 2026 cannot be deferred again. New gains you realize can still be invested in a QOF under the OZ 2.0 rules.

## Sources

- [26 U.S.C. §1400Z-2, special rules for capital gains invested in opportunity zones (Cornell LII)](https://www.law.cornell.edu/uscode/text/26/1400Z-2)
- [IRS: About Form 8997, Initial and Annual Statement of QOF Investments](https://www.irs.gov/forms-pubs/about-form-8997)
- [AFS: IRS releases Notice 2026-40, transitional guidance on qualified opportunity zones](https://www.afslaw.com/perspectives/alerts/irs-releases-notice-2026-40-transitional-guidance-qualified-opportunity-zones)
- [PKF O’Connor Davies: Preparing for the 2026 QOZ gain recognition](https://www.pkfod.com/insights/preparing-for-the-2026-qualified-opportunity-zone-gain-recognition/)
- [IRS: Invest in a Qualified Opportunity Fund](https://www.irs.gov/credits-deductions/businesses/invest-in-a-qualified-opportunity-fund)
- [Treas. Reg. §1.1400Z2(a)-1, deferring gains by investing in a QOF (Cornell LII)](https://www.law.cornell.edu/cfr/text/26/1.1400Z2(a)-1)

_FundTaxes guides are general information, not tax or legal advice._