Investor Profile – 1031 Exchange vs. Qualified Opportunity Zone Fund

Our team at Fortitude Investment Group is extremely familiar with a variety of investment strategies geared towards tax deferral, tax mitigation, and tax-elimination. However, the two most common conversations we have center largely around the 1031 Exchange and the Qualified Opportunity Zone.

The IRC Section 1031 Exchange is the gold standard of tax-deferral strategies and has been since the 1920’s. Over the course of nearly a century, the tax-deferred Section 1031 exchange has allowed certain investors to sell real estate, machinery, vehicles, equipment, artwork, collectibles, livestock, patents, and other intellectual property without fear of incurring a hefty tax bill, assuming specific rules are followed. 

In 2017, the passage of the Tax Cuts and Jobs Act changed the 1031 exchange. Investors are now limited solely to the exchange of “real” property. For most, that effectively limits the 1031 exchange to real estate investments.

However, the Tax Cuts and Jobs Act of 2017 also introduced us to the Qualified Opportunity Zone (“QOZ”) and the potential benefits therein. Both 1031 and QOZ offer investors the potential for capital gains tax deferral. Both are closely associated with real estate and real estate investment. It would be reasonable to assume that those investors utilizing QOZ’s are also utilizing 1031 exchanges, and vice versa. Yet my experience with clients has shown otherwise - the two strategies appear to attract separate and distinct “investor profiles.”

This is certainly not exhaustive, and there is some overlap between the two, but I can broadly characterize my experience with each type of investor.

Qualified Opportunity Zone Fund Investor Profile

• Clients seeking upside potential over cash-flow, less concerned about #CashOnCash (#CoC) returns because QOZF investments are often development projects¹
• Focused on equity multiples rather than Internal Rates of Return (“IRR”)
• Clients with longer investment horizons because of the mandated 10-year minimum hold for maximum benefit
• Clients with diversified portfolios (not just real estate) due to the tax benefits of QOZ’s applying to capital gains of all kinds – this attracts HNW white collar professionals with capital gains from stock, artwork, and even the sale of vacation or primary residence real estate

1031 Exchange Investor Profile

• Clients focused on generating cash flow and driving CoC returns, more skewed to acquisitions of existing stabilized or value-add properties¹
• Focused on IRR’s rather than equity multiples
• Clients who are active in their real estate investing, exiting property successfully, and looking to “rinse and repeat” with a new acquisition (think value-add multifamily, self-storage, retail, or office, for example)
• Clients taking advantage of the market environment to sell labor-intensive properties and acquire more passive real estate (think NN, NNN, and DST replacements, for example)

For any questions or to schedule a consultation, please reach out to our team at Fortitude Investment Group today!

¹ Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated.

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Important Disclosures

This is for informational purposes only and does not constitute as individual investment advice. There are material risks associated with investing in DST properties and real estate securities including liquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Past performance is not a guarantee of future results.  Potential cash flow, returns and appreciation are not guaranteed. IRC Section 1031 is a complex tax concept; consult your legal or tax professional regarding the specifics of your particular situation. This is not a solicitation or an offer to sell any securities. DST 1031 properties are only available to accredited investors (typically have a $1 million net worth excluding primary residence or $200,000 income individually/$300,000 jointly of the last three years) and accredited entities only. If you are unsure if you are an accredited investor and/or an accredited entity please verify with your CPA and Attorney.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
The case study does not reflect actual clients. Any reference to securities is based upon historical data that is public sourced. No statement made herein is to suggest stock market performance or future performance, and no case study is used to imply future performance. The case study is intended to illustrate services available through the adviser. They do not necessarily represent the experience of any clients. Fortitude Investment Group does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services through Concorde Asset Management, LLC (CAM), an SEC-registered investment adviser. Insurance offered through Concorde Insurance Agency, Inc. (CIA). Fortitude Investment Group is independent of CIS, CAM and CIA.

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