Should I do a 1031 Exchange or an Opportunity Zone Investment?
Tax changes from the 2017 Congress are still making waves in the economy – especially the real estate sector. Section 1031 exchanges only apply to real estate now. Personal property no longer qualifies for 1031 deferral treatment.
Most recently, everyone is talking about investing in Opportunity Zones because they can also help real estate investors defer their taxes. What are the main differences? We will review some of the standout differences between a 1031 exchange and Opportunity Zone investment, but we encourage you to talk to your tax counsel for more details.
REAL ESTATE NOT REQUIRED.
1031 Exchanges require a sale of real estate, but for Opportunity Zones, you can invest funds distributed to partners from the sale of an asset.
NO TRACING OF FUNDS.
For a 1031 exchange, you need a qualified intermediary to hold funds so that the taxpayer does not have “constructive receipt” of funds. For Opportunity Zone investment, you only need to have a Qualified Opportunity Fund set up to invest the funds, and you can keep the funds in your own bank account until that is set up. The IRS does not require tracing the money trail.
ROLLOVER GAIN DUE 2026.
For Opportunity Zone funds, you can defer the capital gain up until December 31, 2026, at that time you receive the benefit of a step up in basis, but the remaining capital gains tax is due for payment to the IRS. An investment held for 5 years will cut off 10% of those capital gains taxes, and 7 years will cut off 15% of that gain. In contrast, 1031 exchanges defer taxes until the taxpayer cashes out (at that time all gain is due) or passes to heirs (at which time all previous capital gains are permanently deferred).
MUST PURCHASE PROPERTY IN AN OPPORTUNITY ZONE.
For Opportunity Zone investment, you must purchase property in a designated opportunity zone. Visit the National Map. However, a taxpayer using a 1031 exchange can purchase real property anywhere within the U.S.
Want more details regarding your situation?
Call our Exchange Professionals at (214) 295.6281.