Qualified Opportunity Zones vs. 1031 Exchanges – Kiplinger’s Personal Finance

Real estate investors have used the Section 1031 exchange for decades to trade assets while deferring taxable gains. On the other hand, the qualified opportunity zone program provides real estate investors options to defer taxes and, in some cases, even eliminate taxable profits altogether, which has led real estate investors to ask: Which is better, a 1031 tax exchange or a qualified opportunity zone real estate investment?

The IRS has established strict regulations for both alternatives, and some real estate investments may qualify for both tax breaks. Before choosing between the two approaches, real estate investors should understand how the differences affect their taxable gains.

What Is a Qualified Opportunity Zone?

Communities in economic distress needing investment and revitalization are known as “opportunity zones,” but many properties within these districts have undergone significant changes and are ripe for development. As a result of the Tax Cuts and Jobs Act of 2017, opportunity zones offer tax incentives for investing in community development in these areas to encourage economic growth and job creation.

Opportunity zones range from rural areas without services, to blighted neighborhoods, to areas that have experienced economic redevelopment. The governors of each state nominate a small number of tracts that meet the criteria for official designation as qualified opportunity zones (QOZs). Opportunity zones are designated and certified by the Secretary of the U.S. Treasury Department, with approval from the IRS.

Over 8,000 qualified opportunity zones exist in the United States, accounting for 12% of all Census tracts. The Department of Housing and Urban Development’s website provides an interactive map highlighting where the opportunity zones are located. Rural areas make up nearly 23% of them.

The federal government created qualified opportunity zones to encourage investment and economic development. This landmark legislation came with several tax benefits for individuals who invested through a qualified opportunity fund. Qualified opportunity funds (QOFs) are investment entities, like companies or partnerships, created to invest in property within opportunity zones. 

Investments made by eligible opportunity funds must meet specific criteria. For example, real estate assets must be new or significantly renovated. It is prohibited to purchase existing real estate without making significant improvements. A substantial improvement to an opportunity zone property means that the opportunity fund investments must be equal to or greater than the value of the asset and must be completed within 30 months.

Benefits of a Qualified Opportunity Zone

Capital gains deferrals from prior investments are the primary tax benefit of opportunity zone programs. In particular, an investor who transfers capital gains from a prior investment into a QOF within 180 days of the sale date can defer taxation on the gain until December 31, 2026.


Source: https://www.kiplinger.com/real-estate/real-estate-investing/604765/qualified-opportunity-zones-vs-1031-exchanges

Leave a Reply

Your email address will not be published. Required fields are marked *