Opportunity Fund for 1031 Exchange

Fort Lauderdale, FL · Member since 2017 · 9 posts · 1 vote

I have a property in Ft Lauderdale FL that is a STR. The price of the house has tripled. I am considering selling but do not want to pay the tax. I therefore considered doing a 1031 exchange yet the challenge is to find a "like" investment that is not also overly inflated in its price. I was given the advice to look into an Opportunity Zone Fund. I was advised that I could take the money from my STR and roll it tax free into an opportunity zone fund. Does anyone have any knowledge/experience with this strategy?

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Whitney Nash

CES® , Qualified Intermediary for 1031 Exchanges · McKinney, TX · Member since 2018 · 42 posts · 144 votes

Hello @Judson Krosney

Unfortunately, you can not 1031 into an Opportunity Zone Fund itself. You can only 1031 into an actual property that is located in the opportunity zone. You would not want to invest in a physical property in the zone without doing the 1031 as that would not provide any tax deferral benefit. If you want to invest in the Fund, you would sell and then invest the gain in the fund directly for the tax deferral benefit. Here are a couple links to learn more:https://abovebelow1031-my.shar... and https://nashionalfinancial-my....

Other like-kind investment options that may not be inflated right now depending on location, etc., would be land, DSTs, oil & gas mineral rights, etc.

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Dave FosterBusiness Member
Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
3y
@Judson Krosney, You can do a 1031 exchange into a property that is in an opportunity zone. You will defer all the tax and depreciation recapture. Or you can simply take you gain without the 1031 exchange and invest in a property in an opportunity zone. You only have to invest your gain. But you will have some limits on the deferral. A 1031 and an opportunity zone investment can be made together. Or not.
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Judson Krosney
OP
Fort Lauderdale, FL · Member since 2017 · 9 posts · 1 vote
3y
right....but I'm not interested in going out and sifting throughtopportunity zone properties. I want to just throw the money into a fund that does if for me.....
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Whitney Nash
CES® , Qualified Intermediary for 1031 Exchanges · McKinney, TX · Member since 2018 · 42 posts · 144 votes
3y
Hello @Judson Krosney

Unfortunately, you can not 1031 into an Opportunity Zone Fund itself. You can only 1031 into an actual property that is located in the opportunity zone. You would not want to invest in a physical property in the zone without doing the 1031 as that would not provide any tax deferral benefit. If you want to invest in the Fund, you would sell and then invest the gain in the fund directly for the tax deferral benefit. Here are a couple links to learn more:https://abovebelow1031-my.shar... and https://nashionalfinancial-my....

Other like-kind investment options that may not be inflated right now depending on location, etc., would be land, DSTs, oil & gas mineral rights, etc.
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Account Closed
Manhattan Beach, CA · Member since 2021 · 76 posts · 40 votes
3y
Hi @Judson Krosney I sent you a DM with a bit more info on opportunity zone funds!
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- Pixel Rogue
  PA · Member since 2013 · 136 posts · 19 votes
  1y
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Brandon BruckmanPro Member
Financial Advisor · Milwaukee, WI · Member since 2018 · 110 posts · 96 votes
3y
Quote from @Judson Krosney:
right....but I'm not interested in going out and sifting throughtopportunity zone properties. I want to just throw the money into a fund that does if for me.....

This is possible, you will need to select the fund however. @Dave Foster has the process and options described correctly.
With an opportunity zone fund, the tax bill will come due at the end of 2026. You can not defer your current tax bill forever. If you hold the fund for 10 years, the gain on the investment is tax free.
The question you need to answer is can I make more money in 10 years investing my gain in the fund (plus another investment with your gains) vs performing the 1031 exchange investing in a replacement property?
Hope this helps.

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Chris Montgomery
Real Estate Investor · Steamboat Springs, CO · Member since 2008 · 54 posts · 33 votes
3y
I run a Colorado based Opportunity Zone fund that develops multi family housing. Let me know if you have specific questions. Most of the above information is correct. A few high level points to keep in mind:
- As Whitney said, you don't 1031 into an OZ Fund, but invest in the fund as a 1031 alternative.
- Unlike a 1031 exchange you only have to invest the capital gains from your sale, rather than the entire amount of the sale. You also don't need a qualified intermediary at the time of sale. You do however need to invest into the fund within 180 days of realizing the gain.
- Taxes on your current gain are deferred until the end of 2026. If you keep your investment in the fund for 10 years, your capital gains from the investment are tax free. You are also able to avoid depreciation recapture which is a huge benefit.
- Keep in mind that the deferred taxes on your current gains are due at the end of 2026 and you'll typically need to pay those outside of the investment in the fund. Some funds may be able to provide a distribution based on refinance proceeds in 2026 to help with that, but in today's interest rate environment it can be risky to count on that so it's best to expect to pay the taxes from other funds.
- The OZ tax savings are significant (often in the 35 to 40%) range, but you don't want the tail to wag the dog. The most important thing to do is to select a fund that has solid fundamentals on the project(s) that the fund is investing in. Nobody needs a tax break on a project that loses money!
Feel free to reach out if you have any questions. Those are just a few of the high level considerations when deciding to invest in Opportunity Zones and selecting a fund.
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