Can you 1031 into an Opportunity Zone Fund?

Question

A lot is being written about Opportunity Zones and many small and large investment firms are currently setting up and funding various Opportunity Zone ventures throughout the country. I have several "management" intensive properties that I would like to liquidate and 1031 those funds into an established Opportunity Zone fund and park those funds capital gains tax free for 10 years. Question: Can 1031 exchange funds go into an opportunity zone fund? Is this something that small time investors are doing or these Opportunity zone funds only for the large institutional money. Simply, is the "smart" money flowing to these funds or is this just the beginning of another real estate "tulip" mania. Any small time investors investing in Opportunity zone funds and what has been your experiences? Thanks in advance for your responses....

Gaurav Mehta · Answer

@Doug Hancock: You can put your capital gains in an Opportunity Zone fund. Note that you will only defer your taxes till 2026 at which time you will have to pay 85% of the original capital gains tax. So essentially you are saving 15% taxes and deferring them for 7 years.

The appreciation that you see on a property that you buy through the fund will be tax free if you hold the property for 3 more years (total 10). There are more caveats to this like substantial investment has to be made.

To answer your original question, this is a way to replace 1031. In 1031 you defer until you sell but you still have to pay taxes when you sell. In Op Zone, you are limited to 7 years but have to pay 85% of original due taxes.

Mitchell Benson · Answer

can you clarify on this?

I still don't understand. Your saying its possible to 1031 into an Opportunity zone and get benefits of both? My thought is that you need to buy the property with a "fund" and the company that is doing the 1031 exchange isn't necessarily a "fund"

Robert C. · Answer

@Mark Creason, Thanks for the clarification. Would have been nice!

Mark Creason · Answer

@Robert C.

In the case of a failed exchange, you would still be looking at a total of 180 days to place funds into an opportunity zone project. It does not re-set your timeline at 180 days when the exchange fails.

Robert C. · Answer

@Dave Foster, That's an interesting point from a timeline standpoint if I understand you correctly. So that would mean you could be about a year out before finding the new investment property, right? (If you have a failed 1031 followed by OZ fund timeline).

@Doug Hancock, I think there is a lot of mis-information floating around about OZ investments, so be careful on the forums. Part of that is because the rules are new and people are figuring it out. My read is that 1031 and OZ funds are "two separate tracks" with each having certain advantages and disadvantages. I don't really see the purpose of combining them together (even if you could) as you are suggesting, because I believe there would be more downside compared to just going straight into an OZ fund. With OZ fund you already get the the tax deferral on the capital gains, and you can pull out non-gain equity if you have any. That's what I've come up with at least - I feel like I learn a trickle of new info about OZ funds every month or two.

Dave Foster · Answer

@Doug Hancock, I'm not sure the best and highest strategy would be to plan to 1031 into an OZ fund. For one thing most of the funds are set up just like syndications as LPs or LLCs and you cannot 1031 into ownership of an entity. You must 1031 into actual real estate. That's what @Alina Trigub is referring to - either purchasing a property in a zone or a fund which allows you to take a tenant in common interest in the real estate itself.

However an OZ fund can be used to rescue a failing 1031. You can either do a partial 1031 exchange or let your exchange fail if you can't find suitable replacements. And then invest the now taxable proceeds into an OZ where you can regain the tax deferral.

Alina Trigub · Answer

@Doug Hancock

While you can 1031 into OZ Fund - assuming you stick within the timelines required by 1031, keep in mind the OZ rules that require one to put in (in addition to Cap Gain) an equal or greater amount for the re-development).

Craig Jeppesen · Answer

I am not an opportunity zone expert so take that into consideration, but don’t capital gains go away or are drastically reduced with an op zone fund? I think an op zone is a replacement for a 1031? I am curious of what others have to say here. I am not sure why you would do a 1031 if you will move to an op zone fund.

Can you 1031 into an Opportunity Zone Fund?

Can you 1031 into an Opportunity Zone Fund?

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