Until recently, taxpayers who wanted to defer recognition of capital gains when selling real estate had one option — the 1031 exchange. However, the Tax Cuts and Jobs Act of 2017 introduced the Qualified Opportunity Zone, a new option that has many investors and developers intrigued. Both of these vehicles defer capital gains tax, increase buying power and encourage reinvestment, but as the saying goes, the devil is in the details, and the thoughtful investor will familiarize himself with all the nuances before determining which strategy might be most suitable.
Consider a taxpayer who owns a property that has greatly appreciated in value. The taxpayer would like to sell, but fears the sizeable associated capital gains tax. For almost 100 years, the 1031 exchange has been a viable solution: the taxpayer may sell the property in question — the relinquished property — and fully reinvest the proceeds into a replacement property, in the process deferring capital gains tax on the sale. While a suitable replacement property is being located, a qualified intermediary holds on to the proceeds from the relinquished property.