ACTEC Trust & Estate Talk

Episode: Qualified Opportunity Zone (QOZ) Planning Strategies Post OBBBA

Date: September 8, 2025
Host: Stacy Singer
Guest: Kevin Matz, ACTEC Fellow

Overview

This episode dives deep into how the newly-enacted "One Big Beautiful Bill" Act (OB3) transforms Qualified Opportunity Zone (QOZ) planning strategies for estate planners and investors. With sweeping tax law changes, host Stacy Singer and guest Kevin Matz dissect what has changed, what remains the same, and provide expert advice on optimizing QOZ planning after OB3—especially as the original program sunsets and a new one launches on January 1, 2027.

Key Discussion Points & Insights

1. Background: The QOZ Program’s Two Eras

• The original QOZ program (established by the 2017 Tax Cuts and Jobs Act) ends on December 31, 2026—dubbed "Judgment Day" by Kevin Matz.
• The new era (second tranche) begins January 1, 2027, ushered in by OB3 (HR1), with significant changes for future investments but largely preserving estate planning rules from the original regime.
  [01:17]

2. Core QOZ Benefits (Pre-OB3)

• Tax Deferral: Capital gains from disposed property can be deferred by reinvesting into a Qualified Opportunity Fund (QOF) within 180 days, up to the earlier of the QOF sale date or December 31, 2026.
• Partial Exclusion: Up to 15% of the reinvested gain can be permanently excluded if certain holding periods are met.
• Exclusion of Future Appreciation: Gains in QOF value can escape tax if held for at least 10 years.
  [03:37]

3. QOZs & QOFs: Definitions and Mechanics

• QOZ: Economically distressed community nominated by state, certified by the IRS.
• QOF: U.S. partnership or corporation investing in QOZ property; must self-certify via IRS Form 8996 and have at least 90% of assets in QOZ property.
• Single-member LLCs not allowed as QOFs.
• No IRS approval necessary beyond self-certification.
  [04:44]

4. Estate Planning Rules Under QOZ (and Their Survival Post-OB3)

• IRD (Income in Respect of a Decedent): Inherited QOF interests are IRD—no step-up in basis at death; heirs inherit both the interest and its built-in tax liability, which comes due on "Judgment Day" (12/31/2026).
  • “If someone inherits an interest in the Qualified Opportunity Fund, they are also inheriting a built in income tax liability that comes due on Judgment Day.” — Kevin Matz [08:29]
• Special Cap on Included Gain: Inclusion amount for recognized gain is capped to the fair market value of the investment at the time of inclusion, not the original deferred gain amount. Lack of marketability/control does NOT reduce this value for tax purposes.
• Gifts and Bequests Traps:
  • Gifts (other than to a grantor trust): Treated as a disposal—triggers tax on deferred gain; a key “trap for the unwary.”
    • “You make a gift... of an interest in a QOF that is a deemed sale. Watch out.” — Kevin Matz [10:58]
  • Gifts to grantor trusts: No taxable event; holding periods and QOZ benefits continue.
  • Bequests at death: Heir steps into decedent’s shoes, but no step-up in basis; they must also plan for the deferred gain inclusion.
  • Final regs (2019): Clarifications on how gifts, grants, and bequests are taxed.

5. Pass-Through Entities and the 180-Day Investment Window

• Partnerships can allocate recognized gain to partners, who then can reinvest in QOFs.
• Partners have multiple 180-day windows: date of partnership's sale, end of partnership’s tax year, or filing deadline for partnership’s return (without extensions).
• ACTEC’s advocacy helped shape these flexible rules. [13:52]

6. Counterintuitive Traps and Transactional Nuances

• No inclusion event for partnership contributions of QOF interests (Section 721 compliant).
• Inclusion event if QOF interest is contributed to a corporation—triggers immediate gain inclusion.
• Transfer of partnership interest (not to grantor trust) is an inclusion event; not so for similar S or C corporation transfers.
• Special rules for QSSTs and ESBTs regarding S corp trusts.

OB3-Specific Changes for QOZ Planning

1. Indefinite Program Extension & Second Tranche Launch

• QOZ program now has no terminal date; new program launches January 1, 2027.
• Every 10 years, states nominate new zones; U.S. Treasury certifies. [15:52]

2. Stricter QOZ Eligibility Criteria

• Repeals the “contiguous tract” rule—tightens which census tracts can qualify. [16:36]

3. New Gain Deferral and Basis Step-Up System

• “Rolling” 5-year deferral: Gains now recognized on the 5th anniversary unless sold/exchanged prior—not a fixed date.
• Permanent 10% basis step-up at 5 years (eliminates old 7-year 5% bonus; caps benefit at 10%).
  • “After December 31, 2026, all gains... will have the benefit of a 10% basis increase after 5 years.” — Kevin Matz [17:04]*

4. New: Qualified Rural Opportunity Fund (QROF)

• Must have 90% of assets in property in designated rural areas (cities/towns ≤ 50,000 pop.).
• Tax benefits:
  • 30% basis step-up (vs. regular QOF’s 10%).
  • Easier substantial improvement requirement (50% vs. 100%). [17:35]

5. “Frozen” Gain Elimination After 30 Years

• OB3 effectively grants a rolling 30-year horizon for gain elimination; at 30 years, basis step-up is frozen at the investment’s fair market value on the 30th anniversary.

6. New Reporting Requirements & Penalties

Summary & Strategic Takeaways

• Most estate planning rules remain unchanged under OB3; traps and opportunities described above still apply.
• Critical Date: December 31, 2026. Investors in current QOFs must plan to have liquidity to pay deferred gains due on this "Judgment Day."
• Future QOF planning must carefully consider the new rolling deferral/basis system and potential advantages of the new rural fund option.
• Watch for further Treasury regulations to clarify lingering uncertainties before January 1, 2027.

Notable Quotes

• “If someone inherits an interest in the Qualified Opportunity Fund, they are also inheriting a built in income tax liability that comes due on Judgment Day. And when is that outside date? December 31, 2026.”
  — Kevin Matz [08:29]
• “Make a gift... of an interest in a QOF that is a deemed sale. Watch out.”
  — Kevin Matz [10:58]
• “After December 31, 2026, all gains... will have the benefit of a 10% basis increase after 5 years.”
  — Kevin Matz [17:04]
• “Traps for the unwary... careful identification of interests and planning continues to be required.”
  — Kevin Matz [18:33]

Key Timestamps

• [01:17] – Introduction to OB3/HR1 and summary of changes
• [05:48] – QOZ and QOF definitions
• [08:29] – Estate planning issues (IRD, lack of basis step-up)
• [10:58] – Gift and bequest pitfalls
• [13:52] – Partnership and 180-day period for reinvestment
• [15:52] – OB3’s launch of second QOZ tranche and indefinite extension
• [16:36] – Stricter zone eligibility; repeal of contiguous tract rule
• [17:04] – New basis step-up/basis mechanics under OB3
• [17:35] – Introduction of Qualified Rural Opportunity Fund

Closing

Estate planners must stay vigilant: while OB3 transforms the landscape for new investments, the "Judgment Day" deferred gain reckoning for current QOF investors looms large. Most traps, especially regarding gifting and transfer rules, remain under the new regime. Be proactive in liquidity planning, and watch for further regulatory guidance as the QOZ world enters its next chapter.