What are the potential drawbacks of QOFs?

The main drawbacks of QOFs are illiquidity, a long mandatory holding period, elevated fees, concentration risk, and valuation uncertainty tied to development-stage assets.

QOF interests are structured around a 10-year hold to preserve the program's tax-free appreciation benefit, which limits an investor's flexibility if circumstances change. Because interests are rarely exchange-traded, secondary buyers are scarce, and those buyers often can't capture the same tax advantages the original investor had, which further suppresses resale value. Many funds also concentrate their holdings in a single project, geography, or development stage, so a delay, cost overrun, or slow lease-up in one asset can materially affect the entire fund's performance. Legal, administrative, and construction-related costs can add further drag on net returns.

These same factors are why fair market value work on a QOF interest often calls for discounts for lack of marketability and, for non-controlling positions, discounts for lack of control. An interest tied to an under-construction or lease-up-stage project can also carry additional discounts for construction risk, financing risk, and the absence of near-term cash flow. Because a QOF's compliance and reporting obligations, including the inclusion event tied to December 31, 2026, depend on accurate valuation, weak or undocumented fair market value support can put an investor's expected tax treatment at risk.

A qualified opportunity fund valuation that follows USPAP and accounts for these discounts gives investors, LPs, and their CPAs or tax attorneys a defensible basis for tax reporting and audit defense. For a fuller look at the risk side of these investments beyond valuation mechanics, see what are the risks of investing in a QOF.