1031 Exchange vs. Opportunity Zone Fund Investment
No Fees: Almost all 1031 exchanges involve a 3rd party intermediary who charges a fee for the 1031 Exchange. Rolling into a Qualified Opportunity Fund has no fees for the roll over and no intermediary is involved.
No Principal: 1031 Exchanges require you roll into the exchange both the principal and gain incurred. With a Qualified Opportunity Fund, you only have to roll the capital gain into the fund and NOT THE PRINCIPAL.
Qualified Assets: Only real estate can qualify for a 1031 Exchange. With Qualified Opportunity Funds, capital gains from sale of real estate or another investment can qualify for an Opportunity Fund. Other investments like sale of stocks, crypto currency, anything that results in a capital gain.
Investment Structure: 1031's are designed for single asset swaps. Multiple properties can be supported through certain structures, but this option usually comes with high costs, fees, and general inflexibility. Whereas, with Qualified Opportunity Funds they are designed to support a pooled fund that invests in multiple assets.
Capital Gains Tax Deferral: No capital gains reduction is available except through a step up in basis upon death with 1031's. When rolling from 1031 to 1031 you are delaying the tax to later date in time. The idea being, that at a future date and time the tax rate would be lower than it is at time of initial gain.
However, with Qualified Opportunity Funds the Capital gains tax on the initial investment is reduced by 10% after 5 years and by another 5% after 7 years through step up in basis. In total, a 15% reduction is possible (as long as an investor invests by December 31, 2019).
Capital Gains Tax on Final Sale: With regards to 1031 Exchanges, an investor owes capital gains tax on final sale of the asset. In contrast, Opportunity Fund investors can expect permanent exclusion for any gains realized on their initial qualifying investment in the Opportunity Fund if they hold the investment for at least 10 years. In other words, even if the investor realizes a sizable capital gain when they sell their Opportunity Fund investment, they would owe zero federal taxes on that capital gain. In addition, at this time there is no limit on how long an Opportunity Fund investment may be held, which means that investors may be able to build decades of appreciation from any capital gains and owe nothing in capital gains tax on the earnings of the investment when they eventually sell it 10 or more years later.
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