Investing in opportunity zones - a viable alternative to 1031 exchange

[Dan Ikon]

Never used this option, but a client of mine strongly suggested it recently.

Given:

One is looking to sell an investment property after 5 years. A regular depreciation recapture, but a sizable capital gain.

Observed benefits:

No capital gain tax and no tax on dividends if invested in an opportunity zone fund and held for 10 years (it's fine with him).

Sounds good in theory, but are there unseen cons? Which fund? Risks? Overhead?

Anyone who did it and is willing to share their experience - really appreciate it. 

[Ashish Acharya]

@Dan Ikon, 

I’ve seen Opportunity Zone (OZ) funds work well in very specific situations, but I wouldn’t view them as a direct replacement for a 1031, they solve different problems.

The tax benefits are real if you’re okay with the long hold. You can defer the capital gain and, if you hold the OZ investment for 10+ years, the appreciation inside the fund can potentially be tax-free at the federal level. That’s the part that makes it attractive.

However, on the flip side it’s a deferral, not a full escape (at least initially). Liquidity is another big trade-off. Most OZ funds are long lock-ups with very little control, which is very different from owning your own replacement property in a 1031.

The investment itself also matters more than the tax benefit. Many OZ deals depend on the development and can be expensive with fees. State tax treatment can also change the math depending on where you live.

How I generally frame it for clients is if the goal is to stay in real estate, maintain control, and continue compounding, a 1031 is usually cleaner. If the investor wants to exit active management, is okay with illiquidity, and has a long time horizon, an OZ can make sense, but only with realistic expectations.

I’ve seen investors happy with OZ funds when they went in open and didn’t need the money for a decade. I’ve also seen disappointment when it was positioned as a “1031 replacement” rather than a niche planning tool.