A 1031 Exchange vs Opportunity Zone Investment

1031 Exchange vs Opportunity Zone Investment

What is an Opportunity Zone Investment?

The Tax Cuts and Jobs Act (TCIA) created a new investment called an Opportunity Zone on December 22, 2017. This Act encourages taxpayers to invest capital through private investments. Investing in businesses and real estate in distressed communities spurs economic development. Many real estate investors who have used 1031 exchanges are curious about this new possibility. The new regulations have opened up great options for investors and warrants discussion. Many of our clients have asked us which is the right way to go.

Click here for IRS FAQs for Opportunity Zone Investments.

Should I do a 1031 exchange or an Opportunity Zone investment? 

Below is a chart comparing a 1031 Exchange to investing in an Opportunity Zone. Both are tax-deferred strategies that have different requirements and benefits.

Comparison of a 1031 Exchange to an Opportunity Zone

Only business or investment-use property qualifies Allows for any type of investment that has a capital gain
No time restrictions as long as ‘held for investment’ Investment time restrictions 5, 7, 10 years
Tax-deferral and possible tax exclusion with proper planning Tax-deferral and possible tax exclusion after 10 years
Any US investment or business-use property Limited to Qualified Opportunity Zones
Must buy within 180 calendar days Must buy within 180 calendar days
Replacement asset must be of equal or greater value to defer capital gains May buy replacement asset with taxable gain proceeds only
May invest in any real property Must invest through a Qualified Opportunity Fund (OF)

As indicated, a good deal of the decision comes down to the property’s location and the timeline. We encourage you to discuss both strategies with your tax advisor. In doing this, you will determine which course of action would best suit your needs and objectives.

Contact Midland 1031 today to discuss the details of your situation.