Are Opportunity Zones More Advantageous than a 1031 Exchange?
In many cases Opportunity Zones are replacing 1031 Exchanges for real estate investors. Opportunity zones offer more flexibility and allow investors to liquidate funds during the exchange. You can utilize Opportunity Funds to defer capital gains from all asset classes including stocks through 2026.
1031 Exchanges in a Nutshell
A 1031 exchange is a swap of one real estate investment property for another that allows capital gains tax to be deferred. With a 1031 Exchange, investors must reinvest the entire principle of the exchanging property and carry the same debt load into the new property.
What are Opportunity Zone Investments?
The 2017 Tax Cuts and Jobs Act established the Qualified Opportunity Zone program to provide a tax incentive for private, long-term investment in economically distressed communities. Investors in these programs are given an opportunity to defer and potentially reduce tax on recognized capital gains.
How Does an Opportunity Zone Work?
To defer a capital gain, a taxpayer has 180 days from the date of the sale to invest the realized capital gain dollars into a Qualified Opportunity Fund. The Opportunity Fund then makes an investment in a qualified opportunity zone. The Opportunity Zone Investment must be held through 2026 at which time the deferred capital gains tax will be due.
The taxpayer may invest the return of principal as well as the recognized capital gain, but only the portion of the investment attributable to the capital gain will be eligible for the exemption from tax on further appreciation of the Opportunity Zone investment. The Opportunity Zone program allows for the sale of any appreciated assets, such as stocks, with a reinvestment of the gain into a Qualified Opportunity Fund. There is no requirement to invest in a like-kind property to defer the gain.
What’s the Catch? Opportunity Zones Seem too Good to be True.
Investors must make substantial improvements in their Opportunity Zone investment. “Substantial improvement” requires improvements to exceed the Qualified Opportunity Fund’s initial investment into the existing property over a 30-month period.
For instance, if a Qualified Opportunity Fund acquires existing real property in an Opportunity Zone for $1 million, the fund has 30 months to invest an amount greater than the $1 million purchase price for improvements to the property in order to qualify for this program.
More Opportunity Zone Perks
Once improvements have been made to your property your investment may cash flow. If you hold your Opportunity Zone Investment for over 10 years any appreciation in the property is tax free.
Where Can I Find Opportunity Zones?
Idaho and Montana State have websites displaying Opportunity Zones within the state. The state provides market research on the properties giving potential investors insight into best uses.
Need an Educated Broker for your Opportunity Zone Investment in Idaho, Montana, Colorado or Hawaii?
Call Kirsten (208) 721-4131.