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 investment encourages taxpayers to invest capital through private investments in businesses and real estate in distressed communities to spur economic development. Many real estate investors who have used 1031 exchanges in the past are curious about this new possibility for investing in real estate. The new regulations have opened up more great options for real estate investors and bears discussion. Many of our clients have asked us which is the right way to go.
Here is a link of FAQ from the IRS website which answers a lot of questions about 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 their own separate requirements and benefits.
Comparison of a 1031 Exchange to an Opportunity Zone
|1031 Exchange||Opportunity Zone|
|Only business or investment use real 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 real 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 location of the property and the timeline that the investor is working from. We would strongly encourage you to discuss both strategies with your tax advisor to determine which course of action would best suit your needs and objectives.
Contact Midland 1031 today to discuss the details of your situation.