Sooner or later, many successful families face the same moment: a business sells, a building that cost $800,000 is now worth $4 million, a stock grant has quietly become most of the portfolio, or an inherited rental is finally ready to go. The gain is large, and so is the tax bill that comes with it.
The One Big Beautiful Bill Act, signed July 4, 2025, rewrote a meaningful part of the deferral toolkit. It made the Opportunity Zone program permanent and overhauled how it works, restored 100% bonus depreciation for good, and left the traditional tools (§1031 exchanges, installment sales, UPREITs, exchange funds, and the step-up in basis) as the backbone of sound planning.
I compare the main structures on their merits and show which tool fits which kind of asset. One date drives the urgency: most of the new Opportunity Zone rules take effect January 1, 2027, which is about ten weeks away as of this writing.
The 2027 Window: Why Timing Matters Right Now
Under the original Opportunity Zone program (call it “OZ 1.0”), every dollar of deferred gain has the same hard stop: it is recognized on December 31, 2026, or earlier if the investment is sold. So a gain invested in a Qualified Opportunity Fund today under the old rules is deferred for, at most, a couple of months. It lands on your 2026 return either way. The 10-year exclusion on the fund's own appreciation still applies, but the deferral itself is essentially gone.
The new program (“OZ 2.0”) applies to investments made on or after January 1, 2027. Its deferral is no longer pegged to a single calendar date. It rolls: each investment defers the gain for five years from the date it is made.
That creates a planning window. A taxpayer generally has 180 days after realizing a gain to invest it in a Qualified Opportunity Fund. A gain realized in the second half of 2026 may therefore be investable in early 2027, under the new rolling five-year deferral, instead of in 2026, where it would be recognized almost immediately. Likewise, a sale that is still in negotiation may be worth closing in January rather than December if Opportunity Zone reinvestment is part of the plan.
Two cautions. First, the 180-day clock has its own technical rules for partnership and S corporation gains passed through on a K-1, for §1231 gains, and for installment payments, so the start date is not always the closing date. Second, Treasury guidance on the transition is still developing. Confirm your specific facts with your tax advisor before relying on a 2027 investment date. But if you have a large gain in 2026 and Opportunity Zones are on the table, this is the conversation to have before year-end, not after.
Opportunity Zones 2.0: What Changed
The core idea is unchanged. You reinvest a capital gain (only the gain, not the full sale proceeds) into a Qualified Opportunity Fund that invests in designated low-income census tracts. In exchange you get deferral, a partial basis increase, and potentially tax-free appreciation on the new investment. The mechanics changed in several important ways for investments made on or after January 1, 2027.
Rolling five-year deferral. The original gain is recognized at the earlier of the date you sell the fund interest or five years after the investment date.
A single 10% step-up. If you hold the fund interest for five years, your basis in the deferred gain increases by 10%, meaning 10% of the original gain is never taxed. The old tiered 10%/15% structure is gone.
A 30% step-up for rural funds. A Qualified Rural Opportunity Fund, which must hold at least 90% of its assets in rural zones, earns a 30% basis increase at five years. “Rural” generally means a tract outside any city or town of more than 50,000 people and its adjacent urbanized area.
The 50% substantial-improvement test. Funds that buy existing buildings must “substantially improve” them. For rural property the threshold dropped from 100% of the building's basis to 50%, and that change took effect when the law was signed in July 2025. It makes rehabilitating existing rural buildings far more practical.
The 10-year exclusion, with a 30-year limit. Hold the fund interest at least 10 years and the appreciation on the fund investment itself can be excluded entirely. Under the new rules, the basis is fixed at fair market value at the 30-year mark, so appreciation after year 30 is not sheltered.
Zones are redesignated every ten years, and the new maps take effect January 1, 2027. The qualifying income test tightens (median family income at or below 70% of the area median, down from 80%, or a poverty rate of at least 20% with income capped at 125% of the area median), and the old rule that let contiguous non-low-income tracts qualify is eliminated. Some current zones will drop off the map.
Funds and investors face expanded annual reporting, with penalties for failures. Expect more paperwork, and expect a well-run fund to have it handled.
Opportunity Zones are a real, statutory, Congress-approved incentive. But the tax benefit does not rescue a bad investment. You are committing capital for five to ten years or more, often in a single real estate project or operating business in a lower-income area, with limited liquidity. Underwrite the fund and the sponsor as carefully as you would any illiquid private investment.
Section 1031 Exchanges: Still the Workhorse for Real Estate
For investment and business real estate, the §1031 like-kind exchange remains the most reliable deferral tool in the Code. OBBBA did not change it. Sell investment or business real property, reinvest through a Qualified Intermediary into other investment or business real property, and the gain, including depreciation recapture on the real property, is deferred.
The rules are strict and unforgiving. You have 45 days from closing to identify replacement property in writing and 180 days to close (or until your tax return due date, if earlier, unless you extend). You cannot touch the proceeds; that is the Qualified Intermediary's job. To defer the entire gain, you generally need to buy property of equal or greater value, reinvest all the net cash, and replace any debt paid off. Cash or debt relief you keep (“boot”) is taxable.
The key contrast with Opportunity Zones: a 1031 exchange requires you to reinvest the whole sale proceeds into real estate, while an Opportunity Zone requires you to reinvest only the gain, into a fund. If you want to take some money off the table, the comparison matters.
The classic long-term strategy is to exchange repeatedly over a lifetime and hold the final property until death, when the step-up in basis can erase the deferred gain entirely. More sophisticated variations include exchanges involving a partner buyout or mixed-use property that also qualifies for the §121 home-sale exclusion. Our firm's affiliated Qualified Intermediary, Olympic Exchange Accommodators, handles the exchange mechanics.
Section 721 UPREITs: The Exit Ramp From Active Ownership
Many owners eventually tire of tenants, toilets, and refinancing but don't want to trigger a large gain. The UPREIT (Umbrella Partnership REIT) structure offers a path. Under §721, you contribute property to a REIT's operating partnership in exchange for operating partnership units, generally without recognizing gain. The units typically pay distributions similar to REIT dividends and can later be converted into publicly traded REIT shares.
A common route is two steps: a 1031 exchange into fractional interests in a Delaware Statutory Trust (a passive real estate ownership vehicle), followed a few years later by the sponsoring REIT's §721 contribution of that property into its operating partnership.
The trade-offs are significant. You give up control. Converting units into REIT shares, or the REIT selling the property you contributed, can trigger your deferred gain, so check the operating partnership's tax protection terms. And the UPREIT is a one-way door: once you hold partnership units, you can no longer do a 1031 exchange with them. For most owners the plan is to hold the units until death and let the step-up in basis do the rest. That can be an excellent estate plan, but it should be a deliberate one.
Concentrated Stock: Exchange Funds and §351 ETF Conversions
Real estate owners have §1031. Holders of a single, highly appreciated stock position (founders, long-time employees, early investors) do not. Two structures fill some of that gap.
A §721 exchange fund is a private partnership that pools appreciated stocks from many investors. You contribute your single position, generally tax-free, and after a holding period (typically seven years) you can leave with a diversified basket of securities. To avoid being treated as an “investment company,” which would make the contribution taxable, these funds generally hold at least 20% of their assets in illiquid qualifying assets, usually real estate. They are typically limited to investors with substantial investable assets, charge ongoing fees, and lock up your capital. Your original low basis carries over to what you receive; the gain is deferred, not erased.
A §351 ETF conversion works differently and suits a different investor: someone whose portfolio is already reasonably diversified but locked in by embedded gains. Appreciated securities are contributed to a newly launched ETF in exchange for ETF shares. To qualify, the contributed portfolio must itself be diversified, with no single security above 25% of the total and the five largest holdings no more than 50%. The advantage is immediate liquidity in a professionally managed fund; the limitation is that it does not help someone holding one stock. Again, basis carries over.
Washington residents should note that the state's capital gains tax applies to stock and other intangible assets, so the value of deferral on a stock position can be higher here than on real estate. More on that below.
Section 453 Installment Sales: Sound Planning When Done Right
The plain installment sale is one of the oldest and most legitimate deferral tools available. If you sell property and receive at least one payment after the year of sale, §453 generally lets you report the gain proportionally as the payments come in. Seller financing of a business sale or a building, where the buyer pays over years under a promissory note secured by the asset, is the classic example.
The rules have limits worth knowing. Depreciation recapture is taxed in the year of sale regardless of when payments arrive. Large installment obligations (generally above $5 million in aggregate) carry an interest charge on the deferred tax. Selling to a related party who resells within two years can accelerate your gain. And critically, under §453A, if you pledge the installment note as security for a loan, the loan proceeds are treated as a payment on the note and the deferred gain becomes taxable.
The real risk in a traditional installment sale isn't tax; it's credit. You are now the bank. If the buyer defaults, you may get the asset back in worse condition years later. Good drafting (security, guarantees, default remedies) matters as much as the tax analysis.
Permanent 100% Bonus Depreciation: Offsetting Rather Than Deferring
OBBBA permanently restored 100% bonus depreciation under §168(k) for qualifying property acquired and placed in service after January 19, 2025. It also added a temporary 100% deduction for certain new qualified production property (factories and similar facilities) under new §168(n), and raised the §179 expensing limit to $2.5 million.
Bonus depreciation does not defer a gain; it generates deductions that can offset income. For real estate investors, the usual technique is a cost segregation study on a newly acquired building, which reclassifies components such as fixtures, certain electrical and plumbing, and land improvements into shorter-lived property that qualifies for immediate expensing. On replacement property in a 1031 exchange, the additional basis from new money or added debt is often the best candidate.
Two cautions. Accelerated depreciation creates recapture later, and recapture on personal-property components may not be sheltered by a real-property-only 1031 exchange. And deductions only help if you can use them; passive activity rules limit many investors. Plan the exit (another exchange, an UPREIT, or holding until death) when you take the deduction, not when you sell.
The Step-Up in Basis: The Ultimate Deferral
Every structure above defers gain. Only one tool routinely eliminates it: holding an appreciated asset until death. Under §1014, heirs generally receive a basis equal to the asset's fair market value at the date of death, so decades of deferred gain, including gain rolled through a lifetime of 1031 exchanges, can disappear. In Washington, community property can receive a double step-up at the first spouse's death.
This is why deferral planning and estate planning cannot be separated. A structure that defers gain for 30 years and then lets the heirs inherit with a fresh basis is a very different outcome from one that defers gain for seven years and then triggers it.
The step-up has limits. In Revenue Ruling 2023-2, the IRS confirmed that assets held in an irrevocable grantor trust that are not included in the grantor's taxable estate do not receive a step-up at death. Sometimes that is a deliberate and sound trade-off, freezing a growing asset out of a taxable estate. Sometimes it is an expensive accident. Retirement accounts do not step up either. We cover these and other pitfalls in Basis Traps That Cost Heirs Thousands, and the role of life insurance in funding capital gains liquidity in The Modern ILIT.
The Washington Angle
Washington adds its own layer. The state's capital gains tax, upheld by the Washington Supreme Court in 2023, applies at 7% to long-term gains above an annually adjusted standard deduction, with an additional 2.9% (9.9% total) on gains above $1 million. It applies to stocks, bonds, business interests, and other intangible and tangible assets, but real estate is exempt. A qualifying family-owned small business may also be eligible for a deduction on its sale.
The practical effect: for a building, the tax is federal (plus the 3.8% net investment income tax where it applies), and a 1031 exchange remains the primary tool. For a business sale or a concentrated stock position, the combined federal and Washington rate can approach or exceed 30%, which makes the deferral choice more valuable. Because Washington's tax generally starts from federal long-term capital gain, a gain properly deferred federally is generally deferred for Washington purposes too, but confirm how the state treats your particular structure. We discuss related strategies in Four Strategies for Managing Capital Gains in Washington.
Matching the Tool to the Asset
An appreciated investment or business building. Start with a 1031 exchange. Consider an UPREIT if you want out of active management, an installment sale if you're willing to carry the buyer, and an Opportunity Zone fund if you want to take most of the proceeds and reinvest only the gain. Pair new acquisitions with a cost segregation study.
A business sale. Installment payments (an earn-out or seller note) are common and sound. Opportunity Zone reinvestment of the gain may fit, and the 2027 timing question is most acute here. If the company is a C corporation, ask whether the §1202 qualified small business stock exclusion applies; OBBBA expanded it for stock issued after July 4, 2025. Washington's family-owned small business deduction may also apply.
A concentrated stock position. Consider an exchange fund for a single stock, a §351 ETF conversion for an already-diversified but locked-up portfolio, Opportunity Zone reinvestment, or, for the charitably inclined, charitable strategies that are beyond the scope of this post. Holding until death may still be the best answer for part of the position.
Inherited real estate. First, get a date-of-death appraisal. Thanks to the step-up, there may be little gain to defer. If the property has appreciated since the death, a 1031 exchange is available once the heirs hold it for investment, and Washington's capital gains tax does not apply to real estate.
Plan Before the Sale, and Before Year-End
Almost every structure in this post must be in place before closing. A 1031 exchange requires a Qualified Intermediary before the sale closes. An installment structure must be agreed before the buyer is locked in. Opportunity Zone reinvestment has a 180-day clock. And the transition to the new Opportunity Zone rules on January 1, 2027 means that for gains realized this year, the timing decisions are happening now.
If you are facing a significant gain from real estate, a business, or an investment portfolio, we would be glad to help you compare the options on the merits and coordinate the deferral strategy with your estate plan and your real estate or business succession goals. Contact our office to schedule a consultation.
This article reflects the law as of October 2026. Opportunity Zone guidance under the new rules is still developing. This is general information, not tax or legal advice for your situation; work with your attorney and CPA before acting.
