1031 vs Opportunity Fund

Section 1031 Like Kind Exchange

With a Section 1031 exchange, you sell your property and invest all the proceeds in
another like-kind replacement property of equal or greater value. If you never sell your 1031 exchange property, you never pay tax on your deferred gain. Your heirs get the property with a stepped up (FMV) basis and don’t have to concern themselves with your previous tax deferral. If they sell the property immediately, they will pay little or no tax on the disposition. However, if you sell your Section 1031 replacement property, you will pay capital gains tax on both the original deferred gain and any new appreciation since the exchange.

A Section 1031 Exchange is a good choice if you want to stay invested in real estate until your heirs inherit your property. They will receive a stepped-up basis in the property that will minimize their tax consequences.

Opportunity Fund Investment

If you use an Opportunity Fund, you don’t need to acquire another property. Instead, you must invest (only) your gain in an Opportunity Fund. An Opportunity Fund is a qualified entity that pools investor’s money together to invest in properties that are in designated qualified areas called Opportunity Zones. You will have to pay the tax on your gain on your 2026 tax return. However, if you stay fully invested in the Opportunity Fund for 10 years or more you will not pay any tax on the fund’s appreciation.

The Opportunity Fund option is a good choice if you want to get out of the hassle and responsibility of commercial or rental property ownership. It is also a good choice if you want to take some money off the table. You can pocket all proceeds except the gain amount and still achieve the tax deferral and possible future tax elimination.