The short answer
Either one, but not both for the same dollars. Under Reg. section 1.1400Z2(a)-1(c)(7) a partnership that recognizes eligible gain may itself invest in a qualified opportunity fund and elect to defer, in which case the deferred gain never reaches the partners' K-1s. If the partnership does not elect, paragraph (c)(8) puts the gain in your distributive share and lets you elect on your own return, with a 180-day window that starts, at your choice, on the entity's sale date, the last day of its tax year or the unextended due date of its return. The same rules apply by analogy to S corporations, trusts and estates.
At a glance
| Entity election | The partnership may defer some or all of its eligible gain by investing itself |
|---|---|
| Effect | Deferred gain is excluded from the partners' distributive shares under section 702 |
| Partner election | If the entity does not elect, each partner may defer their share on their own return |
| Partner's clock | Default: last day of the partnership year; or the entity's own 180 days; or 180 days from the return due date |
| Calendar-year due date | March 15 under section 6072, without extensions |
| Related-person test | Applied to the partnership, and again to the partner, for a partner-level election |
| Who files Form 8997 | Whoever holds the fund interest: the entity, or each investing partner |
| S corporations, trusts, estates | Analogous rules; a grantor trust or its owner may elect |
The entity can make the election, and then the gain never reaches your K-1
Reg. section 1.1400Z2(a)-1(b)(13) lists partnerships among eligible taxpayers, and paragraph (c)(7) says a partnership may elect to defer recognition of some or all of its eligible gains. The partnership invests an amount equal to the gain in a qualified opportunity fund within its own 180 days, which run from the sale under section 1400Z-2(a)(1).
When it does, the partnership does not recognize the deferred gain, and that gain is not part of any partner's distributive share under section 702. Your K-1 shows no deferred gain, and the fund interest is a partnership asset that every partner owns indirectly.
That is the consequence to weigh. The partnership's later sale of the fund interest, the ten-year election and the year-five inclusion all happen at the entity level and are shared pro rata, so an entity election suits partners who agree on the plan and expect to stay together for a decade.
If the entity passes, each partner decides alone
Paragraph (c)(8) covers the other route. If the partnership does not elect, the gain is included in the partners' distributive shares in the ordinary way, and a partner whose share includes eligible gain may elect under section 1400Z-2(a)(1)(A) to defer some or all of it by investing personally.
Two conditions attach. The gain must be eligible gain with respect to the partnership in the first place, and it must not arise from a sale to a person related to you, the partner, under the 20% test in section 1400Z-2(e)(2). So a partner who is family to the buyer cannot defer even when other partners can; a sale to a family member or business partner works through that test.
The partner route lets one owner defer, another take cash and a third split the difference, because each election covers only that partner's share. It also means each investing partner, not the entity, holds the fund interest and makes the later decisions.
A partner's 180 days can start on three different dates
Paragraph (c)(8)(iii) sets the partner's window. By default it begins on the last day of the partnership taxable year in which the gain is taken into account. If the partnership did not defer all of its eligible gain, you may instead elect a window that is the same as the partnership's own, or one that begins on the due date of the partnership's return without extensions.
Section 6072(b) puts a calendar-year partnership's return due on March 15 following the close of the year, so the latest start is March 15 and the latest investment day falls in September of the year after the sale. The entity's own window is the earliest; year-end sits between. What date starts the 180-day window has a dated example.
The choice interacts with the 2025 act. Money invested after December 31, 2026 is deferred until the earlier of a sale or five years with a 10% basis increase, while money invested on or before that date is included on the 2026 return, as the deferral length for 2026 versus 2027 explains. A late-2026 entity gain with a March 15, 2027 start lands in the new regime.
Hypothetical: three members, one $1,500,000 goodwill gain, three answers
Round, hypothetical figures. A calendar-year LLC taxed as a partnership sells its operating business on August 1, 2027 for a $1,500,000 gain on self-created goodwill, split equally among three members. Member A wants to defer everything, member B wants the cash and member C wants half.
The LLC does not elect. Each K-1 carries $500,000 of long-term capital gain. A elects the March 15, 2028 start and invests $500,000 in a fund by September 2028, deferring the whole share; B reports $500,000 on the 2027 return; C invests $250,000 and reports the other $250,000. Each investor files Form 8997 personally and reports a code Z row on Form 8949.
Had the LLC elected instead, it would have needed $1,500,000 of its own cash in the fund by January 2028, and B would be an unwilling indirect fund investor. Fund interests are private, illiquid and can lose principal, which is another reason to let each owner choose. Model the year-five tax with your CPA under either route.
S corporations, trusts and estates follow the same two-level structure
Paragraph (c)(9)(i) applies rules analogous to (c)(7) and (c)(8) to S corporations and their shareholders and to nongrantor trusts, decedents' estates and their beneficiaries. The entity may elect, or its owners may elect on their shares with the same three start-date choices.
A grantor trust is different: paragraph (c)(9)(ii) lets either the trust or its deemed owner make the election, and the special 180-day rule for owners does not apply, because the owner is already treated as recognizing the gain directly. A C corporation is not a passthrough at all and elects only for itself; a C corporation's own gain in a fund covers that case.
Whoever invests files Form 8997 with a timely filed return every year the interest is held, and the fund will want to know which taxpayer is subscribing before it accepts the wire. If the business also owned its building, that real estate can run a separate exchange on its own clock; sold a business and deferring the gain sets out that split.
Related questions
Can the partnership elect for some of the gain and leave the rest to us?
Yes. Paragraph (c)(7) allows the entity to defer some or all of its eligible gain, and paragraph (c)(8)(iii)(B) gives partners their elective start dates when the partnership did not defer all of it.
Does the date I receive my K-1 start my 180 days?
No. The three statutory dates control: the entity's sale date, the last day of its year, or its return due date without extensions. A late K-1 does not extend any of them.
If the LLC invests, can it later distribute the fund interest to me?
A distribution of the fund interest to a partner is the kind of transfer the inclusion-event rules reach, which the rolling five-year deferral covers. Plan the holder at the start rather than moving it later.
Is an S corporation's shareholder election the same as a partner's?
Analogous, under paragraph (c)(9)(i). The S corporation may elect, or each shareholder may elect on the pro rata share, with the same start-date choices.
Does it matter that the business was sold to one of the partners?
It can. The related-person test is applied at the partnership level and again at the partner level, using 20% ownership in place of 50%, so a buyer who is related to the entity or to you blocks the deferral for that gain.
Sources
Checked against these publications on October 8, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Reg. section 1.1400Z2(a)-1, Deferring tax on capital gains by investing in opportunity zones
- 26 U.S. Code section 1400Z-2, Special rules for capital gains invested in opportunity zones
- Public Law 119-21, section 70421 (opportunity zone amendments)
- 26 U.S. Code section 6072, Time for filing income tax returns
- IRS, Form 8997 and instructions (2025)
- IRS, Instructions for Form 8949
- IRS, Opportunity Zones Frequently Asked Questions