Opportunity Zones or 1031 Exchanges
Qualified Opportunity Zones (QOZs) and 1031 exchanges are both tax-advantaged strategies available to real estate investors, however, each has its set of pros and cons and specific requirements need to be met. The main appeal of QOZ investments is their capital tax deferral benefit. Any capital gains realized within 180 days of a QOZ investment can be eligible for capital gains tax deferral until December 31, 2026, or until the investment is sold, whichever comes first. If the investment is held for at least 10 years, capital gains tax is completely eliminated.
Maximizing QOZ Benefits
Defer taxable income from gain until 12/31/2026
10+ year hold on QOF (qualified opportunity fund) allows for complete tax elimination
Unlike 1031 exchanges, in a QOF transaction, investors with taxable gains from the sale or exchange of virtually any type of property, including the following, may potentially defer gains by reinvesting the proceeds in a QOF within 180 days of the sale or exchange.
Common examples of capital gains include:
Stocks
Mutual Funds
Bonds
Real Estate
Business
Jewelry
Art
Cars
With a 1031 exchange, investors have the potential for continuous capital gain tax deferral when they swap one real estate investment property for another “like-kind” property and continue to “swap till you drop” by reinvesting their gains. Both strategies can serve as powerful investment tools, each with its own specific timeline to follow. The choice depends on the individual investor’s situation and goals.
The table below outlines similarities and differences between a QOZ and 1031 Exchange transaction.
| QOZ | 1031 |
|---|---|
| Reinvest only capital gain | Reinvest all sales proceeds (basis and gain) |
| No identification deadline | 45 days to identify |
| 180 days to reinvest | 180 days to reinvest |
| Gains from any investment eligible | Like-kind: investment property for investment property |
| Deferred gain taxed 12/31/26 | Gain deferred indefinitely |
| No taxes due on gain after 10 years | All gain may be recognized upon sale |
| No debt match requirements | Total purchase price (debt/equity) calculation required |
| Constructive receipt of proceeds allowable | Qualified Intermediary required |
| 90% test every 6 months | No ongoing compliance required |
This article was originally published by Inland. You can view the original article, here.
