Compare 1031 Tax Exchanges with Opportunity Zones | Kathy Overfelt and Tony Overfelt

Comparison of

1031 Tax Exchanges

vs.

Opportunity Zone Investments



1031 Tax Exchanges
  Opportunity Zone Investments
       
Overview

Section 1031 of the U.S. Internal Revenue Code (26 U.S.C. § 1031) allows taxpayers (under specific conditions) to reinvest capital gains realized from the sale of real property when re-invested into a ‘like-kind’ property.

 

Opportunity Zones were created when the Tax Cuts and Jobs Act of 2017 was signed by President Trump on December 22, 2017.  Investments in Qualified Opportunity Zones, when made through Qualified Opportunity Funds (QOF), enable investors to temporarily defer and potentially reduce capital gains taxes (under specific conditions).

       
Geographic Limitations

No geographic restrictions.

 

Investments must be within designated census tracts as nominated by the state governors and approved by the IRS.

       
Timing Conditions

Replacement property must be identified within 45 days of sale of relinquished property.  Closing on replacement property must occur within 180 days.

 

Investments have no intermediate step to identify re-investment property.  Closing on investment must occur within 180 days of capital gain triggering event.

       
Property Restrictions

Must be real property and replacement property must be like-kind.  No substantial improvement required for replacement property.

 

Capital gain can be from sales of stocks, bonds, real estate, private business sale, etc.  Re-investment can be in real property or in an operating business.  Substantial improvement tests can apply.

       
Investment Conditions

Entire proceeds of sale of relinquished property must be used to acquire replacement property.

 

Only the realized capital gain must be re-invested.  Investment must be through a Qualified Opportunity Fund (QOF).  QOF can invest in corporate stock, partnerships, real estate, etc.

       
Qualified Intermediary
Investors are required to use a Qualified Intermediary that is not an agent or fiduciary of the investor.
  Investors are required to use a Qualified Opportunity Fund to make the investments in a Qualified Opportunity Zone.
       
Tax Deferral Limitations

Tax can be deferred indefinitely by holding the replacement property or by exchanging the replacement property for another replacement property.  Capital gains can be excluded upon the death of the taxpayer.

 

Capital gains tax can be deferred until 2026 or until the investment is sold, whichever occurs first.  Tax can be reduced up to 15% if held for 7 years.  Capital gains from the appreciation of the investment are tax exempt if held for 10 years.