Comparing Opportunity Zone Funds and 1031 Exchanges

Thursday, April 18th, 2019 and is filed under AI Insight News

It’s important to understand the differences between 1031 Exchanges and the newest alternative investment, Opportunity Zone Funds. While Opportunity Funds and 1031 Exchanges both provide tax deferral mechanisms, there are important differences between the two programs. Read the comparison below, then review the education and training resources available to you. 

3 key differences

1. When investing in an Opportunity Fund, the deferral of capital gains applies to any property held by the investor (i.e., sales of stock, tangible personal property, real property), whereas 1031 Exchanges are now limited solely to gains from disposition of real property.
2. 1031 Exchanges require reinvestment of all of the disposition proceeds, whereas Opportunity Funds allow investors to invest only the gains. This provides investors with a degree of liquidity, as they can sell an asset and retain an amount of cash equal to the basis in the disposed-of asset and invest an amount equal to the capital gains without facing an immediate tax bill.
3. There is no intermediary requirement for an Opportunity Fund investment. There is also no “like­kind” requirement for an Opportunity Fund investment to qualify to its tax deferral benefits, unlike 1031 Exchanges.

Tax deferral regulations

Investors should also keep in mind that gains can be deferred indefinitely through 1031 exchanges. According to proposed regulations, the latest a taxpayer will be able to defer paying taxes on existing capital gains through Opportunity Fund investments is December 31, 2026. Opportunity Funds may provide tax relief for non-qualifying transactions under Section 1031, namely short-term gain property and “blown” I.D. period situations.

Comparison chart

 

 

 

 

Resources

• AI Insight CE course, Introduction to Opportunity Zones
• AI Insight CE course, Introduction to Internal Revenue Code 1031 Private Placements
• Webinar: Introduction to Opportunity Zones
• Opportunity Zone Funds for Financial Advisors
• Opportunity Zone Funds for Financial Firms

Content Source: AI Insight CE course, “Introduction to Opportunity Zones”, created in collaboration with Kyla M. Ehrisman, JD, MBA and Alan Lincoln, MBA, CCIM of Mick Law P.C. LLO.