1031 exchange vs opportunity zone

5 Replies

Hi All,

I have an investment property I'm selling in the next couple of weeks, which I bought in 2016 with $250k, expect to get $400-450k after expenses, with capital gain of $150-200k.  I'm looking into options on what to do with the funds.

1. Take the cash and pay tax on capital gains ($150-$200k, could be more with the depreciation recapture in the past 5 years)

2. Do a 1031 exchange and defer tax. I don't want to buy and manage another property myself, so I've been looking into DST 1031 exchange which I can buy ownership and have other people manage it for me. Has anyone had experience doing that?

I've been looking at 1031crowdfunding.com website and their deals, has anyone used this site? Would you recommend them?

3. Take the profit portion from the sales and invest them in an opportunity zone fund, again I'm looking at the deals on 1031crowdfunding.com, any experience sharing would be much appreciated.


Given my case, which option would you recommend?  What're the pros and cons of each option? TIA!

Jason

Most of the DSTs I looked at had so many internal fees that by the time you were figured them all in a large percentage of the tax savings was effectively lost. Not sure what that achieves unless you are desperate to get out of the saddle, and even if so there seem to be better ways (e.g., keep the property as a rental and get a good PM).


Honestly, the right Qualified Opportunity Zone Fund can be the ticket for you. I suggest doing that.

@Jason Woods , stroking a check for $50K ish up front digs a pretty good hole to crawl out of.  That's lost ground forever.

an opportunity zone lets you defer for a period of time.  And you only have to reinvest the profit.  You'll still recap depreciation.  And the deferral isn't forever.

The DST option defers all. Turns any personal debt into non-recourse debt. leaves your option open to continue 1031ing.

So all things being equal on the potential of the next deal my preferences would be 2/3/1

@Jason Woods this is a very good question that gets too little attention. 

Option #1 - This is a really big tax bill to swallow, and if you're keen on possibly reinvesting then this should only be a last resort. The math just doesn't work. Unless you absolutely want to get out of the REI game, need the money fast for something totally unrelated...I'd skip this. 

Option #2 - You can 1031 into a DST, which is a fine option. It's passive, there are lots of good DST sponsors with great track records and good premium property portfolios. But DSTs have their limitations too -- so you could go another "passive" route that is friendly to 1031 exchanges. A TIC partnership in a NNN property is probably the second-most common here. Just speak with an intermediary to get a lay of the land.

Option #3 - Unlike 1031s, the OZone doesn't defer your depreciation recapture. So you'd pay that. But!  You only have to reinvest the gain (whereas in a 1031 you must buy replacement property of equal value to what you sold) and you might get some psychic value out of reinvesting in a distressed area.  But fund sponsors vary a lot, there's relatively little performance history, and you don't get permanent deferral (which is possible with 1031). 

We could advise better if you wouldn't mind highlighting what variables matter most to you...?


Thanks all for your input, very much appreciated.

I don't need the cash, but my partners wanted to sell so we're selling the property.  We've had a good run, property value almost doubled since we bought a few years back. 

I don't want to spend time to buy another investment property and manage it myself, I want to spend my time on other things, that's why I've been looking at other passive options. I've been looking at DST 1031 exchange, it's just seem so complex, the fee is also high, as Christopher mentioned.

Opportunity zone fund is attractive to me because I only need to invest profit (smaller portion), tax defer is good enough for me, I expect to be lower tax bracket in 10 years.

My biggest challenges is to find the investment managers I can trust.  I'm totally fine paying them if they're good and can provide value to me, but I find a lot of them lack either integrity or capability, sometimes both.  I have to spend a lot of time on identifying the right managers and deals, monitoring them, which isn't my idea of passive.

On the plus side, if I can figure out DST 1031 and find trustworthy managers, I can rinse and repeat with my other properties with the same process. I probably won't be very excited with the returns I could get from them, I got lucky in the past decade and have had a great run doing it myself.