QOZ or 1031 Exchange: Which Offers Better Tax Benefits for Investors?
In this video, Origin principal David Scherer explains the differences between the Qualified Opportunity Zone program and the more well-known 1031 Exchange.
With 1031 Exchanges, investors can only use capital gains derived from the sale of a real estate asset. With Qualified Opportunity Zone investing, all capital gains can be invested under the tax program, potentially unlocking trillions of dollars in value.
With 1031 Exchanges, investors are required to invest both the amount paid for the initial property and the gain derived from that initial property into the program. With Qualified Opportunity Zones, investors are only required to invest the capital gains generated from the initial sale. And once again, that initial sale does not have to be a real estate asset with Qualified Opportunity Zones.
Qualified Opportunity Zones are only found in areas deemed financially distressed during the 2010 census, while 1031 Exchanges can be anywhere in the US. Many areas deemed economically distressed in 2010 are now areas of high growth.
The spirit of the QOZ program is to incentivize investors to inject capital into financially distressed areas. So in addition to purchasing the property, investors must improve the property by as much as they pay for it. This prevents investors from simply buying core assets for cash flow – they need to substantially improve the property. There is no such requirement for 1031 Exchanges.
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The 1031 Exchange allows investors to indefinitely defer their taxes by reinvesting in real estate, however, taxes must be paid when they exit the program. In QOZ investing, the deferral limit is seven years.
Gains on QOZ Investments
The revolutionary benefit of QOZ investing comes when investors realize the gains generated by their QOZ investments: they will pay no taxes on those gains. This is what makes QOZ so interesting to many investors, and so lucrative if done right.