Investing in land can often be an advantageous financial decision, especially when investors take advantage of available incentives to defer capital gains taxes. While many people are aware of the power of 1031 exchanges, investing in Qualified Opportunity Zones (QOZs) offers an attractive alternative for investors who can meet the strict and specific requirements.

Here’s what to know about Qualified Opportunity Zones!

What is a Qualified Opportunity Zone?

Established by the Tax Cuts and Jobs Act of 2017, Qualified Opportunity Zones are economically disadvantaged communities around the country where the government is looking to encourage development and job creation. The U.S. Treasury Department identifies these zones and offers tax incentives for investors who reinvest their capital gains into Qualified Opportunity Funds (QOFs).

What is a Qualified Opportunity Fund?

Qualified Opportunity Funds are the investment vehicles used to invest in properties and businesses within a QOZ. Investors place eligible capital gains into a Qualified Opportunity Fund, which are then used to purchase partial ownership shares in real estate projects located in a QOZ. 

To qualify for tax deferral benefits, investors must commit 100% of their capital gains to a QOF within 180 days of closing on the sale of their relinquished property, which is the same time frame as a 1031 exchange. 

Differences Between 1031 Exchanges and Opportunity Zone Investments

There are a handful of aspects that differentiate a QOZ investment from a 1031 exchange, which makes QOZ investments an attractive option for some investors.

Investing in a QOZ can allow sellers to access their original investment since they only need to reinvest the capital gains portion of their proceeds to qualify for tax deferment. So if a person buys a property for $10,000 and then sells it for $15,000, they only need to reinvest the $5,000 in capital gains to defer those taxes. Compare this to a traditional 1031 exchange, which requires sellers to reinvest all of their proceeds into a replacement property. For some investors, the stricter requirements associated with QOZ investments are worth access to their original investment capital.

Stricter Rules

Unlike the 1031 exchange, Qualified Opportunity Funds have a few stricter rules that may make them a less viable investment vehicle. The main restriction with QOZ investments is that funds must remain invested in a QOF for at least 10 years to receive a step-up in basis and tax-free appreciation. Compared to a 1031 exchange, which can be performed over and over again at a much higher frequency, QOZ investments can leave some investors feeling like their capital is stuck.

While they aren’t as universally applicable as 1031 exchanges, Qualified Opportunity Zones offer an alternative path for some investors. To make the most of their land investments, landowners should consult with experienced tax advisors and land experts, such as the Land Professionals at National Land Realty.