The Opportunity Zone Funds and 1031 Exchanges are a way of reinvesting gains from investment in real estate. These programs are a creation by the Internal Revenue Code and Congress to create valuable tax benefits. Both tools are essential in managing tax liabilities and acquiring massive tax-benefited investments.
There are however, notable differences between both regimes. One is older, while another has a national plan to promote investments in specific regions. How can you know which program is best for a shareholder?
What are the 1031 exchanges?
Investors who reinvest in replacement property after selling the original property can defer tax from the existing property. The investor who rolls their investment into another continues to receive deferrals until the property has a taxable sale.
The 1031 Exchange limits the scope of eligible property because it eliminates intangible and personal property. This age-old method is the number one way that real estate investors never pay taxes on assets.
What are the opportunity funds?
The Opportunity Fund is the newest system, which began operating in 2017. The purpose of the program is to encourage long-term investments in low-income areas in the US.
How do the programs compare?
Savvy and long-term investors are familiar with the 1031 Exchange program and recognize that they differ from the newest program in the following ways:
The Opportunity Fund investment only requires the reinvestment of capital gains within six months. The investor does not have to deploy the entire benefit because the regulations require one only to submit the rolled over portion. One is, therefore, free to use the principal for any other purpose of their choice. Placing an investment fund is also simple than the 1031 Exchange because one does not need an intermediary.
An investor should reinvest both the capital gain and the principal within six months. The transaction should be through a qualified intermediary.
1031 Exchanges allow exchanges of real estate assets, whereas Opportunity Zones enable the investment of stocks, real estate, bonds, and other investments possessions.
The 1031 Exchange program is simple because it only allows one to swap one property for another. While you can still swap multiple properties, you will usually come into higher fees and reduced flexibility. The difference with Qualified Opportunity Funds is that the latter allows one to pool funds for multiple properties in different locations and classes.
You can defer capital gains from 1031 Exchanges indefinitely, while those from an initial investment can only have deferrals until the last day of 2026.
1031 Exchange limit reduction of capital gains only after the death of the investor. Opportunity Funds allow one to receive basis step-ups after a couple of years, to match a certain percentage.
The investors owe a certain percentage of capital gains after selling the asset through the 1031 Exchange program, while the Qualified Opportunity Funds have zero taxes on the capital gains.
Galena Equity Partners has a compelling Qualified Opportunity Zone that is conceivably better than your 1031 Exchange. Look into pour qualified Opportunity Fund real estate benefits to understand how you can become part of the most significant legal tax benefit program.
Qualified Opportunity Fund