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 real estate investment possibility. The new regulations have opened up more great options for real estate investors and warrants discussion. Many of our clients have asked us which is the right way to go.
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.
|1031 EXCHANGE||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 purchase within 180 calendar days||Must purchase within 180 calendar days|
|Must purchase replacement asset for equal or greater value to defer capital gains||May purchase replacement asset with taxable gain proceeds only|
|May invest in any real property||Must invest through a Qualified Opportunity Fund (OF)|
As the comparison indicates, a good deal of the decision comes down to the property’s location and the timeline. We strongly 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.