Why 1031 Exchanges Are Less Desirable Now Than They Once Were

The 1031 Exchange has been the real estate investors friend for years. Investors using the 1031 Exchange have been able to defer capital gain taxes, seemingly until death. However, a new capital gains deferral and avoidance program is now available to investors that has experienced investors questioning whether the 1031 exchange cycle is worth continuing. This new option is called a Qualified Opportunity Fund.

In the past the experienced real estate investor would acquire a desirable asset and they could in theory 1031 exchange out of that property into an equally desirable asset. However, most investors have had a different experience from this. Often an investor will get their asset under contract and then begin searching for a new property. Even with this added time the 45-day identification period after closing is often not long enough for many investors to find an equally desirable asset. Instead many investors get saddled with the choice of either paying the capital gains taxes or acquiring a mediocre asset. There is another option.

Whether you are an investor who missed their identification period deadline or you don’t want to acquire a poor performing asset, investment in a Qualified Opportunity Fund may make more sense for the following reasons:

1. A Qualified Opportunity Fund does not have the same 45-day identification requirement that 1031 exchanges have. While both require an investor to place the capital into a project within 180 days there are differences that occur after this time frame. In a 1031 exchange an investor must close on the property within the 180 days. However, when an investor places their capital gains into a Qualified Opportunity Fund the fund only has to set the capital aside for a specific project within two annual reporting time frames. The fund can wait to disburse the capital into the right asset for as long as 30 months.
   • For the Galena Opportunity Fund this means that an investor can take advantage of investing in a real estate fund that strategically selects desirable assets. Additionally, this added time allows investors in the Galena Opportunity Fund the time necessary to benefit from the increased returns that can come from developing new assets. There simply is not enough time for the average investor to complete these types of projects with the tight time constraints of a 1031 exchange.
2. When an investor decides to finally get out of the 1031 exchange cycle, they typically must pay capital gains taxes at the time of their next tax return. Instead, investment into a Qualified Opportunity Fund allows investors to defer payment of the capital gains tax until April 15, 2027. Therefore, investors can earn returns on capital that would otherwise be paid to the federal government as taxes. In addition, investment in a qualified opportunity fund enables investors to reduce the taxes owed on their capital gains by potentially 10 to 15 percent depending upon when the investor’s capital is placed into the fund.
   • Investment in the Galena Opportunity Fund enables investors to earn income on the capital that would normally be lost to taxes. The Galena Opportunity Fund strategically invests this capital to maximize the investors returns. For investors that get their capital into the Galena Opportunity Fund early enough these returns, paid as dividends, may even be enough to cover the cost of the investor’s capital gains taxes.
3. Many investors who get stuck in the 1031 exchange cycle began with the idea that they were doing the right thing by reinvesting their capital into another single asset. Being tied to a single asset can be a risky investment, especially when investors end up with a mediocre asset due to time constraints.
   • The Galena Opportunity Fund is a multi-asset qualified opportunity fund. Being a multi-asset fund reduces an investor’s potential investment risk since not all of the investor’s capital is tied to a single asset. The Galena Opportunity Fund makes investment into multiple assets a reality for investors who like the deferral of capital gains taxes. The Galena Opportunity Fund also reduces an investor’s risk by spreading the fund’s capital out across multiple states, assets, and in strong and growing markets. The Galena Opportunity Fund manages the assets for investors thus reducing many of the headaches that come with managing asset on their own. Yet Qualified Opportunity Funds offers even more.
4. A 1031 exchange only defers capital gains taxes it cannot provide any opportunity to avoid paying capital gains taxes in the future.
   • The best benefit that comes from investing in the Galena Opportunity Fund, is the ability to avoid paying capital gains taxes. An investor can accomplish this by keeping their capital placed into a Qualified Opportunity Fund for a minimum of 10 years. An investor can continue to receive this benefit by holding their capital in the fund until December 31, 2046. Staying in the 1031 exchange cycle will prevent investors from realizing this specific benefit that is only offered by investment into a Qualified Opportunity Fund.

The 1031 exchange was the only option for investors to defer their capital gains. There is now another option, which for many is a better option. The Galena Opportunity Fund is here to help investors who missed their identification period deadline or for those ready to get out of the 1031 exchange cycle. For more information visit www.galenafund.com.

*The Galena Opportunity Fund is for accredited investors only; the minimum investment is $250,000.