When it comes to tax deferral strategies for realized capital gains, we believe the IRC Section 1031 Exchange is considered the gold standard. Tax deferred exchanges have been utilized by the savvy investor as far back as the 1920’s, following a 1921 amendment to the federal tax code. Over the course of more than a century of evolution and permutation, the tax deferred exchange allowed investors to sell real estate, machinery, vehicles, equipment, artwork, collectibles, livestock, patents, and other intellectual property without fear of incurring a hefty tax bill.

With the passage of the Tax Cuts and Jobs Act (TCJA), the newest iteration of the tax-deferred exchange took shape in 2017. The 1031 Exchange is now limited solely to the exchange of “real” property (ask your CPA). For most, that effectively limits the 1031 exchange to real estate.

However, as we’ve discussed previously, the TCJA also introduced the Qualified Opportunity Zone, a boon for the tax-averse that were impacted by the new limitations imposed upon the 1031 exchange.  Check out the helpful chart at the end of this article to see the differences between 1031 Exchange and Qualified Opportunity Zone investment strategies and give us a call if you’d like to talk tax-deferral!

It’s Not Too Late to Defer 2023 Capital Gains by Investing Before September 10, 2024 

Investors familiar with QOZ rules may know that there is a 180-day window during which an individual must reinvest their gains to be eligible for the aforementioned tax benefits. Similar to the 1031 exchange, the clock starts on the day when an asset is sold, and the capital gain is realized.

However, the rules become slightly more complicated (and potentially more advantageous) for pass-through entities. This includes partners in a partnership, members of a limited liability company, shareholders of an S-Corporation, and beneficiaries of a trust, among others. 

In these scenarios, individuals may take advantage of additional time before investing in a QOZF, while still receiving the tax benefits. For these entities, the 180-day clock may start on one of three dates:

1. The date that the pass-through entity sold the asset that gave rise to the capital gain
   1. Eg., asset sold January 1, 2023, gain generated January 1, 2023
   2. 180 days from January 1, 2023 implies reinvestment deadline of June 30, 2023
      
      
2. The last day of the pass-through entity’s taxable year
   1. Eg., asset sold January 1, 2023 & therefore gain generated January 1, 2023, but the last day of the entity’s taxable year is December 31, 2023
   2. 180 days from December 31, 2023 implies reinvestment deadline of June 28, 2024
      
      
3. The due date of the pass-through entity’s tax return, without extensions (i.e. March 15 for pass-through vehicles with calendar year-ends)
   1. Eg., asset sold January 1, 2023 & therefore gain generated January 1, 2023, but the due date of the entity’s tax return is March 15, 2024
   2. 180 days from March 15, 2024 implies reinvestment deadline of September 10, 2024

This means that capital gains and/or taxable depreciation recapture generated AS FAR BACK AS JANUARY OF 2023 may still be eligible for deferral until September 10, 2024. 

Check out the helpful chart below for the difference between 1031 Exchange and Qualified Opportunity Zone tax benefits. Don’t hesitate to reach out to our team at Fortitude Investment Group to discuss your situation and the options that might be available to you.

1031 Exchange vs. Qualified Opportunity Zone

Important DisclosuresCertain Qualified Opportunity Zone (QOZ) areas may not be able to appreciate as predictably as more established areas. Some neighborhoods may be more accommodating to development than others, impacting the success of the investment. Development and redevelopment of real estate traditionally have more risk than other types of real estate strategies. The availability and cost of construction and development financing is uncertain and represents a risk inherent in the execution of a QOF strategy. The rules and regulations of the QOZ Program are complex, compliance with the QOZ Program comes with significant challenges. QOFs tend to be illiquid investments for ten or more years. Any discussion regarding “Qualified Opportunity Zones” — including the viability of recycling proceeds from a sale or buyout — is based on advice received regarding the interpretation of provisions of the Tax Cut and Jobs Act of 2017 (the “Jobs Act”) and relevant guidance’s, including, among other things, two sets of proposed regulations and the final regulations issued by the IRS and Treasury Department in December of 2019. A number of unanswered questions still exist, and various uncertainties remain as to the interpretation of the Jobs Act and the rules related to Opportunity Zones investments. We cannot predict what impact, if any. 

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