Opportunity Zone Funds vs an Installment Sale for Deferring Gain

Hans Goldstein handles structured installment sales for sellers comparing deferral options. Email hans@goldsteinco.net or call 213-340-2018. He does not sell opportunity fund interests.

How does a qualified opportunity fund defer gain?

Under IRC §1400Z-2(a)(1)(A), you can exclude from current income "so much of such gain as does not exceed the aggregate amount invested" in a QOF during the 180-day period beginning on the date of the sale. Three consequences follow:

• Only the gain has to go in. You keep your basis and can reinvest or spend it.
• Only capital gain qualifies. §1245 recapture and other ordinary recapture do not; §1231 gain counts only to the extent it exceeds the ordinary recapture, and is not netted against §1231 losses (Reg. §1.1400Z2(a)-1(b)(11)(i), (iii)).
• Installment gain can go in payment by payment. If you sold on the installment method, each year's recognized gain can be invested, and each payment starts its own 180-day window (Reg. §1.1400Z2(a)-1(b)(11)(viii)).

What changed for opportunity zones in 2026 and 2027?

The 2025 budget law (P.L. 119-21, §70421) made the program permanent and rewrote the benefits for amounts invested after December 31, 2026:

Sources: §1400Z-2(b)(1), (b)(2)(B)(iii), (c); §1400Z-1; Reg. §1.1400Z2(a)-1(b)(40); IRS Notice 2026-40 (transitional guidance).

The practical point for a 2026 seller: gain deferred under the old rules is included on December 31, 2026. If you sell and invest in 2026, the gain lands on your 2026 return anyway, so the investment buys almost no deferral; what is left is the 10-year exclusion on the fund's own growth. If your 180-day window runs into 2027, whether an investment made after January 1, 2027 gets the new rules is a question to settle with your CPA against Notice 2026-40 before you commit.

How does an opportunity fund compare with an installment sale?

What does the worked example look like?

Illustrative facts: a married couple sells land in 2027 for a $1,000,000 long-term gain, no recapture. Other taxable income: $100,000 a year (about $132,200 of AGI). Figures use 2026 federal tables (Rev. Proc. 2025-32) as a stand-in; later brackets are indexed.

OZ 2.0 fund. They invest the $1,000,000 gain in a QOF within 180 days and keep the rest of the proceeds. Year of sale: no tax on the gain. Year 5: 90% of the deferred gain, $900,000, is included. Federal capital gain tax that year: $513,700 at 15% and $386,300 at 20% = $154,315, plus NIIT of about $29,724 (modified AGI $1,032,200, $782,200 over the threshold). That tax is due in year 5 whether or not the fund has distributed anything. If they hold 10 years, any growth in the fund's value is tax-free.

Installment sale over 10 years. $100,000 of gain a year. Federal capital gain tax: $15,000 a year, all at 15%, $150,000 in total; modified AGI of $232,200 stays under the NIIT threshold on the gain alone. Interest on the payments is ordinary income and counts toward the NIIT threshold, so the real figure is somewhat higher.

On the gain alone the installment sale comes out ahead in this example (about $150,000 against about $184,000 federal), because the fund's 10% cut does not offset the 20% bracket and NIIT it forces into year 5. The bigger difference is what the money does: in the fund it is a new, illiquid investment whose growth can be tax-free after 10 years; in the installment sale it is a paycheck. The fund fits a seller who wants growth and can hold ten years. The installment sale fits a seller who wants income.

What is the structured sale side, exactly?

The buyer pays the full price at closing. Before closing, you agree to take the proceeds as scheduled payments from an assignment company that funds them with an annuity from an A-rated insurer. The payments are contractually guaranteed by the insurer's claims-paying ability. The trade-offs: the schedule is locked (no speeding up, borrowing against or cashing out, which is what protects the deferral); payments depend on the assignment company and the insurer behind it; the installment method is settled law (§453, Pub 537, Form 6252), but this specific assignment structure has no published IRS ruling, so your CPA or tax attorney should review it; and a commission is built into the pricing. See what a structured installment sale is and the shorter opportunity zone vs installment sale comparison.

Frequently asked

Q: What is a qualified opportunity fund? A: A corporation or partnership organized to invest in qualified opportunity zone property, which must hold at least 90% of its assets in that property. Investors who put capital gain into it within 180 days can defer and partly reduce the tax on that gain.

Q: Is it too late to use an opportunity zone for a 2026 sale? A: For deferral, largely yes: gain deferred under the old rules is included on December 31, 2026. The 10-year exclusion on the fund's own growth is still available. Investments after December 31, 2026 fall under the new 5-year rules.

Q: Do I have to invest my whole sale price? A: No. Only the gain you want to defer has to be invested within the 180-day window. Your basis stays with you.

Q: Can depreciation recapture go into an opportunity fund? A: No. §1245 recapture and other ordinary recapture are not eligible gain. Only capital gain, including §1231 gain above the recapture, qualifies.

Q: Can I combine an installment sale with an opportunity fund? A: Yes. Installment gain can be invested as it is recognized, and each payment starts its own 180-day window. Have your CPA track each investment's clock separately.

Q: Does an opportunity fund pay me income? A: Not necessarily. The fund decides distributions, and the tax on the deferred gain comes due in year 5 either way. An installment sale pays you on a fixed schedule.

What should you read or run next?

• Deferral options compared
• SIS vs 1031 exchange
• Delaware statutory trust vs structured installment sale
• Structured installment sale guide
• IRC Section 453
• Capital gains exit calculator
• All SIS calculators and tools

Who wrote this?