Contrasting 1031 Exchanges with Opportunity Zones

Both are techniques used to defer capital gains taxes on the recent or planned sale of an asset. They can even potentially eliminate them over time, through a step-up in basis at death in the instance of the 1031 exchange or a 10 year holding period in the instance of the Opportunity Zone. Though there are several differences between the two and how they work, for example, the 1031 exchange applies only to real estate used for business, investment or income purposes, whereas the Opportunity Zones apply to any capital gains taxable asset, in addition to real estate. Assuming the asset being sold is real estate, it would be appropriate to consider the which opportunity would be the best fit for the client’s situation, assuming both opportunities underlying investment return opportunities were similar.

Below is a cheat sheet I put together contrasting the various elements critical to either transaction in order to determine which one might be better for a specific client and their situation:

The tax code does not require that individuals be accredited investors for either of these two techniques, however the specific barriers to implementing either strategy such as due diligence, meeting regulatory requirements or deadlines, providing diversification without massive investment or the need for daily management can be extraordinary or prohibitive in many, if not most, instances, which is why third party professional managers are used. It’s the third-party intermediary’s or fund management structure using nonpublicly traded securities that require that investors be accredited most of the time, except for a few publicly-traded REITs.

Hope this helps.

Jeremy Green