Opportunity Zones vs. 1031 Exchanges

Updated January 22, 2024

Sophisticated real estate investors are familiar with Section 1031 exchanges, and related Delaware statutory trusts (DSTs). Opportunity Zones appear similar at first glance. But there are some substantial differences, summarized below.

Rollover

In a Section 1031 exchange, an investor must reinvest the entire proceeds from the transaction (principal, plus gain) within 180 days in order to achieve the full tax benefit. Any amount from the proceeds that is not reinvested is taxable “boot.” A Section 1031 transaction must be conducted through a 1031 exchange accommodator, also known as a qualified intermediary.

With an Opportunity Zone investment, an investor is only responsible for rolling over the gain amount within 180 days. The investor is not required to deploy the entire gain, but only the rolled over portion is eligible for tax advantages. Moreover, the principal can be used for anything. It does not need to be rolled over. And, placing an investment in a Qualified Opportunity Fund is much more straightforward, with no intermediary required.

Qualified Assets

Only real estate gains are eligible for 1031 like-kind exchanges. Conversely, gains from any type of asset sale (real estate, stocks, bonds, etc.) can qualify for investment in a Qualified Opportunity Fund. Section 1231 gain is also eligible for investment in Qualified Opportunity Funds.

Investment Structure

A Section 1031 exchange is structured to allow for single asset swaps, usually one real estate property for another real estate property. Multiple properties can be supported, but this option usually comes with higher costs and less flexibility.

On the other hand, Qualified Opportunity Funds can be either single-asset funds that invest in a single property or business, or multi-asset funds that invest in multiple properties across asset classes and geographies.

Capital Gains Tax Deferral

Capital gains tax payments on a 1031 exchange can be deferred indefinitely. With Qualified Opportunity Funds, capital gains of the initial investment may be deferred until December 31, 2026.

Basis Step-Up And Capital Gains Tax Elimination

With 1031 exchanges, capital gains are eliminated via a step-up in basis to fair market value for the property owner’s heirs at death. With Qualified Opportunity Funds, the investor doesn’t have to die first. The basis step-up to fair market value (resulting in zero capital gains tax liability) occurs after the Qualified Opportunity Fund investment has been held for at least 10 years.

Location, Location, Location

With a 1031 exchange, the investor’s real estate can be located anywhere in the country.

Conversely, Qualified Opportunity Fund investments are limited (mostly) to Qualified Opportunity Zone Property located in Opportunity Zones.

A Comparison Table: QOFs vs. 1031s & DSTs

The table below compares how Qualified Opportunity Fund investment differs from 1031 Exchanges and DSTs.

Investment Aspect	Qualified Opportunity Fund	1031 Exchange / DSTs
Full Tax Benefit Timeline	10-year holding period	Upon death
Triple Net Leasing	Limited	Allowed
Capital Gain Eligibility	Any type of gain. Can be invested into a QOF that holds real estate and/or operating business(es).	Like-kind exchange. Must be a gain from real estate. Can only be invested into another real estate investment property.
Investment Amount	Tax benefit applies only to the gain. Can reinvest full or partial gain.	Entire sales proceeds (principal and gain) must be rolled over for the full benefit.
Investment Strategy / Risk	Capital Appreciation. Ground-up construction, redevelopment, or early-stage business.	Varies (Traditional 1031).Stable Cash Flow (DST).
Timeline For Investment	180 Days	45-Day Rule & 180-Day Rule
Accommodator Rule	None. Funds and investors self-certify.	Requires the employment of a Qualified Intermediary.
Geographic Restriction	Limited to 8,764 census tracts, most of which are “low-income”	No geographic restriction