New tax reform laws drafted in 2017, have formed a unique investment category: Opportunity Zones. Qualified Opportunity Funds have made its way to the list of favorite ways to avoid or defer capital gains taxes on the trade of specific investment properties like 1031 Exchanges. However, 1031 Exchanges and Opportunity Zones are distinct in many ways. Let’s get a better understanding so that you can make an informed decision to choose the best option available for you.
What is 1031 Exchange?
A 1031 tax-deferred exchange allows investors to reinvest the profits from the trade of investment property in one or more replacement properties without inviting immediate federal (and most state) capital gains taxes on the appreciated value. When the sale and purchase fulfill the 1031 exchange standards, taxes are delayed until the newly procured property is sold. This deferral strategy can be duplicated through any number of exchanges until the tax liability crosses into the individual’s estate upon death.
What is Opportunity Zone Investing?
The Opportunity Zone program was designed to revitalize economically distressed neighborhoods using private investments rather than taxpayer dollars. To incite private participation in the Opportunity Zone program, taxpayers who buy in Qualified Opportunity Zones are qualified to benefit from capital gains tax incentives available exclusively through the program.