Long term capital gain: 1031 exchange or Opportunity Fund

[David Song]

Have a property under contract to be sold in July. Expected long term gain of approximately $100K. I have a opportunity zone fund set up already. Would it be better to invest the gain (~100K) directly into the OZF or do an 1031 exchange? Any suggestions would be appreciated.

[Dave Foster]

@David Song, Unless you no longer are looking to invest in real estate in the future, you're probably better off doing a 1031 if you're mainly looking to avoid the large tax hit. The OZ will limit your ability to respond to market changes because of the long hold period. And your options for purchase under 1031 are obviously much greater. You also lose your opportunity to participate in an OZ fund purchase actively. Typically, you must hold the opportunity fund for 10 years before you eliminate 100% of the tax, and you can no longer exchange or take advantage of the tax after that.

If you are looking for passive opportunities, several passive opportunities qualify for 1031 treatment and allow you to indefinitely defer the tax using the right strategy. You keep a wider array of options open and can 1031 into larger or multiple investment properties or a syndication like DSTs (Delaware statutory trust).

DSTs are completely passive and allow you to 1031 into them because they are considered RE, but you can also 1031 back into brick and mortar real estate after the property is sold, or exchange into another DST and continue to defer all of the tax.

The holy grail here would be if you could find a property in a QOZ that you could do a 1031 into, of course. But barring that, it just depends on whatever your motivation is for the future, and you dont want to close any doors until you're sure.