Commercial Investment Real Estate March/April 2019 | Page 35

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1031 Exchanges
Both 1031 exchanges and opportunity zones also have
restrictions when some of the parties to the transaction
are related.
Deferral or Exclusion of Taxable Income
Another consideration when disposing of property, even
by a sale, is the reinvestment of those funds in qualified
properties in an opportunity zone. Investing in a QOF is
required to gain the tax benefits under the program.
Benefits of investing in a QOF include:
• The seller, if qualified, can defer gain from the sale.
For example, a taxpayer selling stock at a gain of
$1,000 can defer the tax on such gain by a proper
qualified opportunity zone reinvestment.
• If the taxpayer properly invests the gain in a quali-
fied opportunity zone via a QOF, the taxpayer could
be allowed an exclusion of up to 15 percent of the
deferred gain.
• If the taxpayer holds the investment in the QOF for
at least 10 years, all the capital gain generated since
the reinvestment can be excluded, assuming all the
program requirements are met.
Section 1031 exchanges differ from QOFs
in many ways:
• A 1031 investment does not require reinvestment in
a specific area of the U.S., as long as it is in the U.S.
Alternatively, by definition, the QOF must be in a
qualified zone.
• The structure of a 1031 exchange requires a good deal
of formality, dealing only with like-kind property. The
type of property in a QOF has a broader range that
can involve real estate or personal property. However,
both 1031 exchanges and QOFs have additional
requirements. For example, QOF property must be
acquired after Dec. 31, 2017.
• Section 1031 requires an investment in trade or busi-
ness property, while the QOF has more flexibility.
• In a QOF, only the gain (not the full sales price) needs to
be reinvested in a QOF to come within the deferral rule.
• As a rule, under 1031 exchanges, the entity transfer-
ring the relinquished property also must be the one
obtaining the replacement property. For example, John
could not transfer Property X under the 1031 exchange
program and then have his corporation acquire the
replacement property. A QOF provides more flexibility
for the investor who sold, for example, a partnership
interest then invested in a QOZ entity.
• Delayed exchanges are permissible in some cases,
which allow for the involvement of other parties and
possibly an intermediary. As such, they provide 1031
transactions with flexibility. Section 1031 exchanges
normally allow for a maximum of 180 days to complete
the transaction, generally from the disposition date
of the relinquished property, such as Property X, to a
reinvestment in the replacement Property Y. The 180-
day timing also can apply to the QOF in some cases.
However, in the QOF, the seller can take possession
and control of the cash from the sale; such cash control
is not allowed in a 1031 exchange.
The QOF may have more flexibility for investors, assum-
ing the investor is willing to move to a QOF and away from,
in many cases, personal control of the assets. This lack of
control also can create some liquidity issues for the investor
in the qualified opportunity zone.
Costs in undertaking these transactions include those
associated with being involved in a qualified opportunity
zone, such as the fees charged by the QOZ and the costs for
the use of an intermediary in 1031.
Most dispositions are structured as sales. The sale may
be formulated as a cash sale or by an installment sale,
allowing the seller to spread income over time as payments
are received. But an outright sale has its advantages and
The new program offers another route
to postpone or eliminate taxable gains.
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