<< Back to FAQ

What happens if a QOZ fund investor dies before holding the investment for at least 10 years, or before deferred taxes are due?

If a QOZ fund investor dies while still holding their QOZ fund interest, it does not trigger a taxable event. Their beneficiary steps into the shoes of the decedent investor and inherits the investment at the decedent investor’s basis. This means that the beneficiary does not get to step up their basis on the investment at the time of inheriting it. However, the 10-year clock on the minimum hold period to receive tax-free appreciation on the QOZ investment keeps ticking. It does not restart when the investment is transferred to the beneficiary.

Once the decedent investor and their beneficiary have held the investment for a combined total of 10 years, the beneficiary gets a 100% step-up in basis upon liquidating the QOZ investment. This results in zero tax liability on the capital gains that the QOZ investment generated over the 10 or more years. Here’s an example:

1. Investment is made in 2021.
2. Investor passes away in 2028 after holding the QOZ investment for seven years and paying their deferred tax liability in 2027.
3. Investor’s beneficiary inherits the QOZ investment in 2028 at its fair market value with no step-up in basis.
4. By 2031 or later, the investment will have been held by the investor and their beneficiary for a combined 10 or more years. At that point, the beneficiary can liquidate the investment. Once they do that, their basis in the investment will step up to the full fair market value at the time of liquidation, resulting in no capital gains tax liability to the beneficiary.

If the beneficiary sells the QOZ investment prior to the investment being held for a combined 10 years by the beneficiary and the decedent investor, the beneficiary would owe taxes on all appreciation generated over the period the QOZ investment was held.

If the original investor dies prior to Dec. 31, 2026, or prior to paying the taxes on the deferred gain due in early 2027, then the beneficiary of the QOZ investment would assume the deferred tax liability and be liable for paying it by their tax payment deadline in 2027.