Qualified Opportunity Zone Investors: Independent Valuations by Dec 31, 2026

Key takeaways:

• December 31, 2026 ends the original QOZ tax deferral period for deferred capital gains invested through a QOF.
• The taxable amount is determined as of December 31, 2026 and is expected to reflect the lower of the investor's deferred gain or the FMV of the QOF interest on that date.
• A lower FMV than the original deferred gain can reduce the taxable amount, but only where the value is properly substantiated.
• Independently prepared FMV appraisals support tax reporting and audit protection, reducing reliance on internal NAV estimates that may not reflect current economics.
• QOZ valuation dynamics often reflect lower gross returns and challenging liquidity, including a smaller pool of secondary buyers due to tax benefit limitations and the 10-year hold requirement.
• Market shifts such as higher debt costs, delayed timelines, cost overruns, and slower lease-up can contribute to discounted valuations versus original expectations.
• Capacity constraints are expected as the deadline approaches, making early planning, data readiness, and appraiser engagement important for timely reporting.
  

What QOZs and QOFs Are, and the Three Original Tax Benefits

Qualified Opportunity Zones and Qualified Opportunity Funds were created to encourage investment in underserved communities by offering tax deferral, a partial basis step-up tied to holding period, and potential elimination of tax on long-term appreciation.

Qualified Opportunity Zones (“QOZs”) were created under the 2017 Tax Cuts and Jobs Act to drive investment into underserved communities. By reinvesting eligible capital gains into Qualified Opportunity Funds (“QOFs”), investors were originally provided with three potential economic benefits:

1. Tax deferral, 

2. Partial basis step-up tied to holding period, and 

3. Elimination of tax on long-term appreciation.

Since the program was launched, billions of dollars have been invested and the QOZ program is approaching a decisive milestone as we near December 31, 2026. 

December 31, 2026 Ends the Deferral Period and Sets the Taxable Amount 

December 31, 2026 is the measurement date that determines the amount recognized for previously deferred gain invested through a QOF, based on the lower of deferred gain or the FMV of the QOF interest on that date.

This date marks the end of the original tax deferral period meaning investors who rolled prior gains into a QOF must recognize that deferred gain in the 2026 tax year, even if they continue to hold the investment past this date. Importantly, the amount subject to tax is determined as of December 31, 2026, and the IRS expects reporting to reflect the lower of the investor’s deferred gain or the fair market value (“FMV”) of their QOF interest on that date.  

Here is what is critical: if an investment has appreciated, tax is based on the deferred gain; however, if the FMV has declined below the original deferred gain, the investor will only be taxed on the lower FMV — creating the opportunity for a materially reduced tax liability to investors who qualify.

This measurement date framework is central to defensible reporting because it ties the recognized amount to a specific valuation point in time.

Independent FMV Appraisals Substantiate the December 31, 2026 Value for Reporting

An independently prepared FMV appraisal provides the substantiation needed for tax filings and audit protection when reporting the December 31, 2026 value of a QOF interest.

To take advantage of this opportunity, QOFs will be required to provide an independently prepared and qualified FMV appraisal, in order to properly substantiate the valuation as of December 31, 2026. Properly prepared valuations will demonstrate FMV in accordance with recognized standards and will provide the appropriate documentation needed for tax filings and audit protection.

If FMV has declined below the original deferred gain, the investor is entitled to report and pay tax only on that reduced value — but only where the value is properly substantiated. Without a current, independent appraisal, taxpayers risk defaulting to original entry values or internal NAV estimates that may be materially higher than economic reality.

Recognized valuation standards for reporting help produce supportable conclusions when values must be substantiated.

QOZ Valuation Nuances: Return Profile and Liquidity Constraints 

QOZ fund interests can face valuation pressure from weaker underlying market fundamentals and from structural constraints that reduce secondary market demand and pricing.

Lower Gross Returns

QOZ investments generally perform lower (on a gross basis) than traditional real estate investments because they are investments in areas with weaker economic prospects. Investors are willing to accept this lower gross return profile since the tax advantages boost the net return. A prospective buyer of a secondary QOZ interest who could not utilize the full tax advantage would likely haircut any offer to participate in the investment (e.g. lowering an offer price is a way to increase the overall return profile of an underperforming investment).

Challenging Liquidity

A 10-year hold is required to maintain the tax-free appreciation, which is a substantial hold period compared to other traditional real estate investments. Any premature exit would relinquish the core benefits. In the event of a potential interest secondary sale, a prospective buyer may not be able to reliably benefit from the tax-advantages as compared with an original investor, thereby decreasing the pool of potential buyers.  

Independent, standards-based documentation supports audit readiness when reported values differ from original entry values or internal NAV estimates. Fund interest valuation methods can help frame how complex ownership economics translate into fair market value.

Why Might a QOZ Investment be Valued at a Discount to the Original Gain?

Shifts in interest rates, cap rates, construction costs, timelines, and lease-up performance can reduce project-level economics relative to initial underwriting, contributing to lower valuations.

Many QOZ projects were capitalized in periods of lower interest rates, more favorable cap rates, and lower construction costs. In today’s environment, rising debt costs, delayed timelines, cost overruns, and slower lease-up may have depressed originally forecasted project-level economics, leading to a decreased valuation.

Investments that were made more recently, and have not yet reached any significant development or stabilization milestones, may also be ideal for an FMV determination.

Planning Ahead: Engagement Timing and Expected Capacity Constraints

The concentration of valuation needs around the same deadline increases the likelihood of capacity constraints, making early preparation of financial updates and supporting materials important for timely completion.

Planning ahead is critical. There are likely to be thousands of appraisal projects needed to support this once in a generation opportunity and they will require valuations at the same time. Advisors, appraisers, and accountants expect capacity constraints as the deadline approaches. Investors with multiple QOF positions may need several valuations, and funds may issue valuation packages that still require investor-level analysis. The sooner data rooms, financial updates, and appraiser engagements begin, the smoother the reporting process will be.

PCE Investment Bankers’ Business Valuation Group has deep experience valuing private real estate funds. We have completed dozens of independent valuations for high-net-worth investors, family offices, and advisors across estate and gift transactions, Roth IRA conversions, and income tax reporting exercises. Because these engagements mirror the complexities inherent in QOF structures, we are uniquely equipped to support investors as the December 31, 2026, deadline approaches and ensure valuations are accurate, defensible, and tax-compliant.

Valuation Provider Experience for QOF Interests

Valuing private real estate fund interests often requires careful analysis of fund structures, investor-level considerations, and documentation standards that support tax reporting outcomes.

Early organization of data rooms and updated financial information can reduce delays when multiple stakeholders need aligned inputs for the same reporting date. Financial statement projection forecasting supports consistent inputs when timelines and performance assumptions have changed.
Please reach out to us if you would like to discuss if this makes sense for your investment or your QOF.

Frequently Asked Questions

Q: Who engages PCE (and pays) for independent QOF interest valuations?
A: Generally, the QOF’s GP or Manager engages the valuation provider and pays for the independent fair market value (FMV) appraisal of the QOF interest.

Q: How will I know whether an independent FMV appraisal is needed for my QOF interest?
A: A discovery call is used to review the key economics and recent developments of each QOF interest, then provide an opinion on whether an independent FMV valuation for December 31, 2026 substantiation makes sense for that specific position.

Q: When should the valuation engagement start for the December 31, 2026 deadline?
A: Engagement is best initiated ahead of the expected fourth quarter 2026 surge in QOZ valuation demand, so scheduling capacity is secured and the information needed for FMV reporting can be shared before high-volume deadlines.

Q: Why hire PCE for a QOF interest fair market value appraisal?
A: The work focuses on private real estate fund interest valuation, and the approach is designed to keep the process smooth while supporting accurate, defensible, tax-compliant FMV conclusions for reporting needs. We have deep experience in valuing Private Real Estate Fund Interests and have a flexible approach to make the process as smooth as possible.

Rolf Witt

Rolf Witt specializes in business valuations for estate planning, ESOPs, corporate transactions, and financial reporting. With over five years of experience, he brings deep expertise in valuing privately held businesses across a range of industries and asset classes.

Read Rolf’s Full Bio