Background
Two areas of tax law that, at first glance, appear unrelated (i) conservation easement deductions and (ii) Qualified Opportunity Fund (QOF) investments may collide at the end of 2026 where valuation is concerned. The issue involved here could put the IRS attack strategy for speculative conservation easement valuations in a new spotlight. Could QOF investors effectively use this strategy against the IRS?
The conservation easement landscape is littered with instances of the IRS challenging taxpayers who claimed large charitable deductions calculated using aggressive real estate development assumptions. The IRS’s general message has been do not value land as if a highly profitable future development is reasonably certain without facts to support that position.
But in a matter of months, that reasoning might work against the IRS in a different context: the mandatory 12/31/26 gain-recognition event for many QOF investors.
Taxpayers and their practitioners should start asking now: could the IRS’s legitimate attacks on speculative conservation easement valuations be misread to mean that development-stage value is inherently suspect? If so, QOF investors may argue that unfinished real estate projects should be valued low precisely when tax is due.
As things stand, we are potentially opening the door for a “heads I win, tails you lose” problem. In the conservation easement context, the IRS argues that taxpayers should not overstate future development value. In the QOF context, taxpayers may similarly argue that the IRS itself agrees that future development value is too speculative to matter.
Opportunity Zone Rules (Plain English)
Under the Opportunity Zone rules, eligible taxpayers may sell appreciated property (i.e., stock or real estate) and potentially defer tax on the gain by timely reinvesting that gain into a QOF. Under IRC § 1400Z-2(b)(1), deferred gain generally must be included in income in the tax year that includes the earlier of the date the QOF investment is sold or exchanged, or 12/31/26.
Under IRC § 1400Z-2(b)(2), the includible amount is generally based on the excess of—
- the lesser of the remaining deferred gain or the QOF investment’s fair market value on the relevant date, over
- the taxpayer’s basis in the
The fair market value limitation keeps valuation front and center. If a QOF investment is worth less on 12/31/26 than the remaining deferred gain, the lower value may reduce the amount included in income. Final regulation commentary clarifies that, for QOF partnership and S corporation interests, the inclusion is generally the lesser of the remaining deferred gain after applicable basis adjustments or the gain that would be recognized on a fully taxable sale of the interest for fair market value [Reg. Sec. 1.1400Z2(b)-1(e)(4)].
Put simply: A QOF interest’s assigned value on 12/31/26 can directly impact the investor’s tax bill.
Note: Existing QOFs and Qualified Opportunity Zone QOZ businesses need to consider Notice 2026-40’s transition rules for certain property acquisitions after 12/31/26, particularly where a project still depends on post-2026 acquisitions or development under a working-capital plan. Notice 2026-40 does not establish any special valuation methods.
The Conservation Easement Lens
Typical conservation easement cases often involve a landowner donating a restriction on development rights and claiming a significant charitable deduction, which is commonly based on the difference between the land’s value before and after the easement.
In certain cases, taxpayers valued the “before” condition as if a development project was not only possible, but highly likely and very profitable. The IRS has attacked valuations based on speculative assumptions, unrealistic development timelines, unsupported revenue projections, or discounted cash flow models that it suspects are engineered to maximize the deduction.
While the IRS’s concerns are legitimate, the IRS may want to be careful that its conservation easement arguments are not so expansive that they can be used to suggest that all development-stage valuation methods are unreliable. If taxpayers bring that argument in the 2026 QOF valuation event, the historic IRS success in attacking inflated conservation easement valuations could end up allowing taxpayers to characterize development-stage value or discounted cash flow analysis as inherently suspect.
Speculative Value Versus Reasonably Probable Value
Perhaps for too long, tax practitioners and taxpayers have been hyper-focused on the distinction: “development value versus no development value.” For purposes of the 2026 QOF valuation event, the distinction that should matter is “speculative value versus reasonably probable value.”
Where a proposed development is purely speculative, such as when an owner lacks zoning approvals, financing, permits, market support, or a realistic path to completion, a valuation that assumes a fully constructed, fully leased, highly profitable project may deserve a healthy dose of skepticism.
On the other hand, it is understood that a project can have real market value before completion. Buyers routinely pay for partially completed or development-stage assets, factoring in things like—
- the extent of completed construction;
- whether zoning and entitlements are in place;
- how much cost remains to complete the project;
- whether market studies reflect demand;
- the existence of leases, purchase contracts, or other revenue commitments;
- whether financing is committed;
- the probability and timing of completion; and
- the risk-adjusted future cash flows a market participant would
What makes sense is utilizing a balanced approach: exclude speculative value but recognize reasonably probable (development-stage) value when market participants would do so. Feasible methods, such as discounted cash flow or subdivision development, exist where market participants price assets based on projected cash flows.
A Simple Example
Assume Maya sold a stock portfolio in 2021, realizing a $1 million capital gain. She timely reinvested that gain into a QOF that is developing a mixed-use (apartment and retail) project in a designated Opportunity Zone.
By 12/31/26, the project is not complete, but—
- the land has been acquired;
- zoning and major permits are in place;
- construction is 70% complete;
- the senior construction loan is closed and funded;
- tenants have executed leases; and
- the local rental market is
Maya’s tax adviser must determine the amount of deferred gain she recognizes for 2026 under IRC § 1400Z-2. If Maya’s QOF interest is valued at $400,000, she may argue for a much lower income inclusion because the fair market value of the investment is less than her remaining deferred gain. If the interest is valued at $850,000, her 2026 inclusion is significantly higher.
And there are legitimate reasons that the numbers could differ so widely under Maya’s circumstances. Indeed, there’s a case to be made that future development value remains uncertain and should be discounted. A taxpayer-friendly valuation could emphasize that the project is not stabilized, not fully leased, and not yet generating its expected income.
That balanced approach highlights the deficiencies in a tax system that treats unfinished as meaning nearly worthless. Maya’s partially completed, entitled, financed project with executed leases may have substantial fair market value despite remaining “unstabilized.”
Why the Government Should Care
Where a project has real development momentum, the IRS should be motivated to prevent taxpayers from using broadly framed anti-easement valuation rhetoric to erase market-recognized value, because there’s a lot of revenue at stake. One rough QOF market signal indicates $120 billion, and using a 23.8% rate, every $10 billion of omitted development-stage value could jeopardize $2.38 billion of federal tax.
Practical Points for QOF Investors
Investors should not lose sight of how much the 12/31/26 valuation matters. If a QOF interest remains in a development-stage project, investors need to be prepared to show up with a valuation supported by contemporaneous evidence. An unsubstantiated conclusion that the project is unfinished won’t suffice.
Use this time to compile helpful documentation that may include—
- independent appraisals;
- construction budgets and completion schedules;
- loan documents and funding status;
- permits, zoning approvals, and entitlement records;
- signed leases, letters of intent, or sales contracts;
- market studies and rent comparables;
- updated financial projections; and
- sensitivity analyses showing how risks were considered.
Practical Points for Tax Practitioners
Practitioners should be prepared to confront the technical mechanics of IRC § 1400Z-2, remembering that the 2026 inclusion calculation accounts for remaining deferred gain, basis adjustments, and fair market value. Then they should separate two very different arguments and choose wisely:
- Weak: “Because the project is not complete, development value should be”
- Strong: “Include development value only to the extent a market participant would pay for it, factoring in probability, timing, cost, and risk.”
Guidance Welcome
Ideally, Treasury and the IRS would provide guidance before the end of 2026, clarifying that tax valuation doctrine is symmetrical: it rejects inflated, speculative projections, but it also rejects artificially low valuations that ignore reasonably probable development-stage value regardless of whether the project is in a QOF or conservation easement.
Conclusion
The 2026 Opportunity Zone inclusion event will place many investors in a tough spot, forcing them to value QOF interests after years of development activity, but before completion or stabilization. Arguably, their goal should be to utilize a market-based valuation that carefully distinguishes speculation from probability.
Taxpayers should begin building a careful valuation record now. Practitioners should be reviewing IRC § 1400Z-2, preparing for potential valuation disputes. As for the IRS, it should strive to preserve a consistent message: tax law should neither reward inflated development fantasies, nor allow taxpayers to erase real economic value.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as National Tax Advisory Memo (NTA-1371), first published other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bimonthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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