How Fair Market Value Could Affect Your 2026 OZ Tax Bill

When an investor defers a capital gain by rolling it into a Qualified Opportunity Fund (QOF), that deferred gain is ultimately recognized for tax purposes on December 31, 2026, unless triggered earlier by an inclusion event.

Real estate attorney Brad Molotsky of Duane Morris joins the show to discuss how the fair market value of an Opportunity Zone investment on that deferral date affects the taxable gain, and what steps investors and fund managers should take to prepare.

Guest: Brad Molotsky, Duane Morris LLP

About The Opportunity Zones Podcast

Hosted by OpportunityZones.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

Listen Now

Episode Summary

On this episode of The Opportunity Zones Podcast, host Jimmy Atkinson is joined by Brad Molotsky, a partner at Duane Morris and co-head of the firm’s Opportunity Zones practice group. With the December 31, 2026 deferral date quickly approaching, Jimmy and Brad unpack one of the most important (but often overlooked) aspects of Opportunity Zone investing: how an OZ investment’s fair market value (FMV) determines how much of a deferred gain ultimately becomes taxable.

Why Fair Market Value Matters

When an investor defers a capital gain by reinvesting into a Qualified Opportunity Fund (QOF), that deferral ends on December 31, 2026, or sooner if an inclusion event occurs. On that date, the investor must recognize the gain and pay the tax in April 2027. But the amount of gain to recognize is not automatically the original deferred gain.

Instead, the statute specifies that the investor must recognize:

  • The lesser of:
    • the original deferred gain, and
    • the fair market value of their OZ investment on 12/31/2026,
  • Minus the basis in the investment.

That final bullet point—basis—typically starts at zero, unless the investor qualified for a 10% or 15% step-up by investing early in the program. A 10% basis step-up applies to OZ investments held for at least five years by 12/31/2026, and a 15% basis step-up applies for those held at least seven years by that date.

So, the FMV figure becomes a crucial variable in determining 2026 tax liability. In some cases, especially for projects stalled or delayed due to market conditions or COVID-era disruptions, the FMV may fall below the original investment amount, thus reducing the tax owed.

How to Determine FMV and Make It Defensible

Jimmy and Brad explore how to establish fair market value in a way that holds up to potential IRS scrutiny. As Brad explains, pulling a Zillow printout won’t cut it. You’ll need something “contemporaneous” and credible:

  1. Best Practice: Full Appraisal. Engage a third-party MAI-certified appraiser to perform a comprehensive valuation around December 2026. This offers the strongest protection in the event of an audit.
  2. Next Best: Broker Opinion of Value. A reputable real estate broker can provide a market-based value letter, though it’s not as ironclad as an appraisal.
  3. Least Ideal: Online Valuation or Assessed Value. These are easily challenged and not typically tied to actual market conditions at the relevant time, but they’re better than nothing.

Brad strongly recommends having this documentation completed close to the 12/31/2026 deadline and saving it for your tax files.

Who’s Responsible for Getting the FMV?

While the fair market value gets reported at the individual investor level, many investors rely on the fund itself—especially in professionally managed funds—to obtain and deliver this valuation. Still, fund documents don’t always obligate managers to provide it. So, Jimmy and Brad advise investors to be proactive:

  • Ideal scenario: The fund manager commissions a valuation and distributes pro rata FMV figures to investors.
  • Fallback: The investor obtains their own FMV assessment if the fund doesn’t.

Because the FMV will be used to complete IRS Form 8997 (or potentially Form 8949), it’s vital that each investor has a defensible number when filing their 2026 return.

Planning for the 2026 Tax Hit

Both investors and fund managers should be planning now—not waiting until late 2026—for how to cover the resulting tax bill. Brad notes that while many expected cash flow from completed projects to fund the tax, reality may not have played out that way in all cases. Investors should:

  • Start setting aside cash to cover potential tax liabilities.
  • Model their worst-case exposure (i.e., assume full tax on the original investment amount).
  • Update those models once FMV becomes clearer in late 2026.

Brad also recommends that fund managers start calling around to appraisers now, or at least by fall 2025, to get pricing and availability. Demand for FMV assessments will spike in Q4 2026, so lining up appraisal services in advance is prudent.

Can FMV Be “Optimized” for Tax Purposes?

In theory, yes—but with caution. Because a lower FMV results in a lower tax bill, there is some incentive to make conservative valuations. But investors and fund managers must avoid anything that smacks of manipulation or abuse. Brad cautions against “creating the market” by generating artificial sales right before year-end. If audited, the IRS will scrutinize such moves—especially for high-dollar investments.

Pro Rata Allocation and Complexity

In most funds, FMV gets allocated to investors pro rata based on their percentage ownership. However, things can get complex if certain investors have preferred positions, guaranteed debt, or other differentiated rights. These scenarios may require more nuanced allocations and additional documentation.

OZ 2.0: A New FMV Era Begins in 2027

Jimmy and Brad also briefly discuss how FMV rules will work under the new Opportunity Zones 2.0 legislation, enacted on July 4, 2025, as part of the One Big Beautiful Bill Act.

For new OZ investments made on or after January 1, 2027:

  • Gain deferral becomes rolling: Investors get a five-year deferral from the date of investment (no longer a fixed date like 12/31/2026).
  • 10% basis step-up: Still available for investments held at least five years.
  • 30% basis step-up for rural areas: A new, enhanced benefit for projects located in defined rural OZs.
  • Tax-exempt appreciation and no depreciation recapture: These benefits remain unchanged from OZ 1.0.

Under OZ 2.0, FMV will need to be determined on a rolling basis—five years from each investor’s entry point. That could lead to year-round appraisal activity, starting in 2032. As Brad notes, this opens a niche market opportunity for appraisers who understand OZ compliance.

Concluding Thoughts

As the OZ 1.0 program nears its critical 2026 tax reckoning, fair market value has become a linchpin issue. Investors and fund managers must get organized now to:

  • Start planning for cash needs well ahead of the April 2027 tax deadline.
  • Understand the mechanics of the FMV calculation.
  • Line up qualified appraisers.
  • Gather defensible contemporaneous documentation.