M id A tlantic Real Estate Journal — Fall Preview — 33
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O pportunity Z ones By Carlo L. Batts, MAI, Rittenhouse Appraisals and The Reduxx Group The 2026 Reckoning: Why opportunity zone investors need to act now
O
pportunity Zones have become a domi- nant tax strategy for
the original deferred gain, you may owe less tax. The Internal Revenue Code permits investors to reduce the value of the investment, specifically lack of market- ability (DLOM), lack of control (DLOC), and risk associated with real estate under con- struction. For investors these discounts are neither theoreti- cal nor insignificant. They can result in material reductions to tax liability. However, the IRS does scru- tinize these valuations careful- ly. Those that are aggressive or unsupported discount positions
are invitations for penalties and deficiency assessments. What To Do Now If you’re invested in an OZ fund, now is the time to engage an independent appraiser to establish a de- fensible fair market value. A comprehensive valuation serves multiple purposes: • It reduces deferred gain recognition through prop- erly documented and sup- portable discounts • It creates audit protection through third-party verification • It informs liquidity planning for 2027 tax payments
• It positions the fund for compliance with ongoing IRS requirements. The clock is ticking. De- cember 31, 2026 is just months away, and tax pay- ments will be due in April 2027. For investors seeking to offset the tax impact of de- ferred gains, strategies such as harvesting unrealized losses in other investments during 2026 or charitable giving can help, and valu- ation will support clearer cash flow planning and fewer surprises. Delaying this analysis is simply deferring
the inevitable; proactive engagement with your valu- ation team now is the most cost-effective risk manage- ment decision available. Carlo L. Batts, MAI, is the principal of Ritten- house Appraisals and The Reduxx Group, both based in Center City Philadel- phia. He has a B. S. in Urban Planning and Real Estate Urban Land Devel- opment from Virginia Com- monwealth University and received his MAI designa- tion from the Appraisal Institute. MAREJ
real estate investors. Since their creation un- der the 2017 Tax Cuts and Jobs Act, inves- tors have poured hun-
Carlo L. Batts
dreds of billions of dollars into designated economi- cally distressed communities through Qualified Oppor- tunity Funds (QOFs). Real estate has accounted for over 60% of these investments. Most investors use a sim- ple structure: the QOF sits at the top, with a real estate company (typically an LLC) below it that ac- tually owns and operates the property. This two-tier approach has proven effec- tive for investors seeking tax efficiency and capital gains deferral. But as we head into the final months of 2026, these investors face a critical problem they may not have fully anticipated. The Deadline You Can’t Ignore On December 31, 2026, all deferred capital gains from Opportunity Zone investments must be recognized as tax- able income. This applies to every investor, regardless of when they invested or whether they’ve sold anything. The impact can be signifi - cant with Investors potentially facing substantial tax bills on their 2026 returns. The most challenging part is that this tax liability exists even if the investor hasn’t received any cash from the investment, or “phantom income.” With approximately $75 billion in deferred gains now coming due, many real es- tate investors have likely underestimated the cash flow impact of this deadline. For those with illiquid real estate holdings such as devel- opment projects, value-add renovations, or operating properties, this creates a real planning challenge. How Valuation Matters The fair market value of a QOF investment directly determines how much tax is owed on December 31, 2026. The good news is if your in- vestment is worth less than
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