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Qualified Opportunity Zones vs. 1031

For years, Code § 1031 has been a popular way to defer taxation on the sale of capital gain assets. However, Code § 1031 has significant requirements, including complex timing and identification requirements and a requirement that the capital gain asset be exchanged with “like kind” property that, as of the enactment of the so-called Tax Cuts and Jobs Act in 2017, must be real property. With the enactment of Code §§ 1400Z-1 and 1400Z-2 in the Tax Cuts and Jobs Act, the ability to defer current capital gains (and potentially avoid taxation on future appreciation) by investing in real property in a Qualified Opportunity Zone has expanded options for taxpayers with capital gains. The following chart compares the requirements, pros, and cons of Code § 1031 Like Kind Exchanges and Code § 1400Z-1 Qualified Opportunity Zones.

  § 1031 Like Kind Exchanges § 1400Z-1 Qualified Opportunity Zones
Relinquished Property – Character and Use
  • Must be real property
  • No personal property, even property used in or on real property as part of business
  • Any property that generates capital gain
  • Can be real or personal, tangible or intangible property
Replacement Property – Character and Use
  • Must be real property
  • No personal property, even property used in or on real property as part of business
  • Tangible property used in a trade or business located in a Qualified Opportunity Zone
  • Can be real or personal property
Does replacement property have to be “like-kind” to relinquished property?
  • Yes
  • All real property is like-kind to other real property
  • No
Identification requirements for  replacement property?
  • Replacement property must be identified in 45 days, with limit on number of properties
  • No separate “identification” requirement, but must be in a Qualified Opportunity Zone
Acquisition of replacement property
  • Within 180 days
  • Must invest in Qualified Opportunity Fund within 180 days
  • Qualified Opportunity Fund must meet 90% Asset Test
Proceeds that must be rolled over into qualifying investment
  • Entire proceeds from sale
  • Only the gain from the sale
Taxpayer vs. Property Analysis
  • Taxpayer selling property must also acquire replacement property, creating issues when partners don’t all want to engage in like-kind exchange
  • Either partnership or its partners may elect deferral. Similar rules apply to other pass-through entities, such as S corporations and their shareholders, and estates and trusts and their beneficiaries
Partnership or LLC interests
  • Not allowed
  • Allowed, as long as meet the requirements of Qualified Opportunity Zone Partnership Interest
Stock in corporations
  • Not allowed
  • Allowed, as long as meet the requirements of Qualified Opportunity Zone Stock
Additional Capital Requirements
  • No
  • Qualified Opportunity Fund must either create a new business located in the Qualified Opportunity Zone or substantially improve an existing business located in the Qualified Opportunity Zone.
Timing of inclusion of deferred gain
  • Upon sale of replacement property (unless further deferred in another like-kind exchange)
  • Earlier of: sale or exchange of Opportunity Zone Fund investment or 12/31/26
Reduction in deferred gain inclusion through basis step-up
  • None
  • 10% basis step-up if hold investment 5 years before December 31, 2026, 15% basis step-up if hold investment 7 years before 12/31/26
Timing of inclusion of gain over and above deferred gain
  • Upon sale of replacement property (unless further deferred in another like-kind exchange)
  • Upon sale of opportunity zone fund unless held for more than 10 years, in which case there would be no gain
Related parties
  • Not prohibited, but 2 year holding period after exchange required
  • Sale to related party cannot be deferred
©2011-2020 Carlton Fields, P.A.

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About this Author

Larry Kemm International Tax Attorney
Of Counsel

Larry Kemm’s practice focuses on international tax matters for both domestic and non-U.S. clients. With 30 years of combined practice as a tax lawyer and CPA, Larry has vast experience advising clients in structuring international transactions and business operations in a tax-efficient manner, and in representing clients before the IRS in international tax disputes.

Larry counsels clients on international tax matters related to the organization and reorganization of cross-border business structures, including international joint ventures, mergers, acquisitions, and divestitures. In...

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Cristin Keane Attorney Corporate Non-Profit
Shareholder

Cristin Keane has extensive and varied experience with closely-held businesses, high net-worth individuals, and not-for-profit organizations. Cristin's experience with closely-held businesses includes limited liability company and S corporation agreement negotiation and drafting, succession planning, federal income, and estate tax matters, ISO and nonqualified stock option plan analysis and drafting, and Section 409A deferred compensation analysis. She represents individuals with respect to their wealth and estate planning needs, particularly with respect to estates containing business interests. Her representation of not-for-profit organizations includes all facets of federal income taxation and state taxation, as well as contract matters and governance issues.

Cristin has experience in drafting a variety of corporate and unincorporated entity agreements, including shareholders’ agreements, partnership agreements, limited liability company operating agreements, distribution agreements, bylaws, redemption agreements, and limited liability company membership interest assignment agreements. She also advises and assists not-for-profit organization clients with preparation of organization documents and corporate governance policies, federal and state tax exemptions and compliance, regulatory agency and reporting requirements, and the creation of donor-advised funds and endowments.

Cristin is board certified in Tax Law by The Florida Bar and she was a Visiting Assistant Professor at the University of Florida Graduate Tax Law Program.

813-229-4211