When a QOF dissolves in year two, the deferred gain comes due early and the investor pays tax on money not yet recovered
Here is a loss worth studying closely. Suppose an investor has 310k of deferred gain sitting in a QOF that holds a small mixed use property in a zone like Trenton, New Jersey. The fund manager decides to dissolve early, saying the market has moved and the basis is strong enough to exit. The investor did not initiate the sale. Their share of the proceeds comes back at 187k after fees, which already stings, but the more painful piece is that the dissolution triggers gain recognition two years earlier than the 2026 deferral date. So capital gains tax on 310k comes due that spring, on money that has not been made back yet. Net on the whole thing, the investor is down somewhere around 89k once the tax hit is added to the loss on principal. Nothing in the PPM prevented an early exit without unanimous investor consent. The investor read the PPM and missed it, because attention went to the improvement test language and the zone expiration and never sat with the governance section long enough. If you are in someone else's fund right now, find the exit and dissolution provisions before anything else, because the tax structure only works if you control the timeline.
