1031 Exchange vs. QOZ Investments

Written By Donna Mackenzie

Understanding the differences between 1031 Exchanges and Qualified Opportunity Zone Investments, to help guide your tax advantaged capital gain decisions.

1031 Exchanges vs. Qualified Opportunity Zone Investments

1031 Exchanges: 45-day identification period and 180-day exchange period. Funds typically locked into the exchange for 180 days even if your investment strategy changes, very limited flexibility and funds are required to be deposited with a fiduciary.

QOZ Investments: 180 days to invest in a QOZ Fund and an additional 180 days to invest in QOZ Investment. More time and flexibility to invest and funds are not required to be with a fiduciary.

Scope

1031 Exchanges: Limited to properties identified during initial 45-day period.

QOZ Investments: The fund can invest in nearly real estate and operating businesses located in an opportunity zone, with some exceptions.

Tax Deferral

1031 Exchanges: Capital gain tax deferred until sale of property purchased with the exchange. Option to do another 1031 exchange and defer taxes again.

QOZ Investments: Capital gain tax deferred until earlier of sale or 2026, plus step up in basis:

  • 5 year investment 10% step up in basis of original capital gains for gains

  • 7 year investment 15% step up in basis of original capital gains for gains

  • 10 year permanently exclude gains realized from the original investment

Investment Amount

1031 Exchanges: Reinvest entire basis and capital gains in new property for tax benefit.

QOZ Investments: Required to reinvest only capital gains for ax benefit.

Sale

1031 Exchanges: Capital gains tax deferred upon sale of old property after rolling all sales proceeds into new property.

QOZ Investments: Deferred capital gains tax not due upon sale of old property. Taxes due (subject to step up in basis) upon the earlier of (i) the date the property is sold, or (ii) December 31, 2026.

Type of Capital Gain

1031 Exchanges: Limited to capital gains from the sale of real estate.

QOZ Investments: No limitations on the capital gains asset class, can include real estate, stock, personal property, intangibles assets, etc.

State Tax

1031 Exchanges: Typically state tax law follows the federal laws and tax is deferred.

QOZ Investments: Many states have not yet declared whether they will follow the new federal law. Some states fully follow federal tax law, some partially and some not at all.

Capital Gain Income Tax

1031 Exchanges: Tax deferred until the date the property is sold.

QOZ Investments: Tax is deferred until the earlier of (i) the date the property is sold, or (ii) December 31, 2026.

Donna Mackenzie