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Opportunity Zone Funds vs. 1031 Exchanges: What Are the Key Differences?

1 February 2021 No Comment

Both the Opportunity Zone Funds, along with 1031 exchanges, are ways to reinvest gains after the sale of one property into another one to avoid current taxation and gain the biggest tax benefits. These are things that have been initiated by Congress and that are codified.

Each of these is crucial tools for managing certain tax liabilities and to acquire different tax-advantaged investments. While it is necessary to find qualified opportunity zone funds near me, there are other things that must be considered, too when investing in properties.

What Is the 1031 Exchange?

An investor who has a 1031 exchange will reinvest in a like-kind replacement property to defer the tax on the gain from the sale of the current property unless and until the replacement property has been sold. If the investor makes the decision to roll the investment into another type of “like-kind property,” then the gains will continue to be deferred until a time where the property has been sold in a taxable sale situation.

Section 1031 was changed by the Tax Cuts and Jobs Act of 2017. These are limiting the scope of what properties are eligible to just real property while eliminating the eligibility of intangible or personal property.

With a 1031 exchange, a person is dealing with a more than a 100-year method for deferring taxes on depreciation recapture and capital gains, which is why so many investors are using 1031 exchanges.

What Are the Opportunity Zones Funds?

The OZ or Opportunity Zones program is something new and was created by Congress as part of the Tax Cuts and Jobs Act of 2017. This resulted in two new sections being added to the IRS code. The idea of the new program is to help encourage longer-term investments for low-income communities in the U.S. Currently, there are more than 8,700 Opportunity Zones around the country, which includes territories like Puerto Rico in addition to the mainland. An investor will be able to defer tax on any type of gains that were invested in a QOF, Qualified Opportunity Fund, until an earlier date when the investment in the QOF is exchanged or sold.

Opportunity Zone Investments vs. 1031 Exchanges

Both these things will provide several federal tax benefits. They also both have 180-day limitations. This is the amount of time that a taxpayer has to complete the entire investment transaction. What makes them different is that Opportunity Zone funds have an advantage over the 1031 exchanges. This is because Opportunity Zone funds will eliminate capital gains taxes that are earned from the Opportunity Zone fund investment when making specific investments.

So, with the Opportunity Zone fund, investors can defer and even reduce the capital gains tax bill they receive. They may also have the ability to eliminate having to pay any type of capital gains when some conditions are present. It is necessary to speak with investing professionals to know for sure what is and is not possible.

Making the Right Decision

When it comes to knowing the difference between Opportunity Zones and 1031 exchanges, there are more than a few factors to consider. Be sure to keep the information here in mind to make the right decision and to ensure that the desired results are achieved for a person’s investments strategies.

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