Maximizing Tax Benefits: Comparing 1031 Exchanges and Opportunity Zones in Montana

Maximizing Tax Benefits: Comparing 1031 Exchanges and Opportunity Zones in Montana

Matt Mellott
Matt Mellott | CCIM, SIOR
How Investors Can Use Opportunity Zones and 1031 Exchanges to Their Advantage Which one works best for your particular situation? In the past few years, much has been discussed about the potential opportunities for investors through Opportunity Zones, especially in cities like Missoula, Kalispell, Bozeman, and other locations across Montana. These designated Opportunity Zones have opened up new possibilities for investors that were not available in the past. For nearly 70 years, the IRC Section 1031 exchange has been a key driver of commercial real estate investment. Originating in the 1950s to incentivize the sale of farmland for more productive uses, the 1031 exchange has remained a central strategy for many investors to minimize tax exposure. However, there is some confusion regarding what an Opportunity Zone can mean for an investor and how it compares to a 1031 exchange. Both offer favorable tax treatment and the deferral of capital gains, but they differ significantly in terms of mechanics, benefits, and restrictions. To understand which one might work best for your situation, read on.

1031 EXCHANGE

A 1031 exchange (1031x) allows the deferral of capital gains and recapture tax when exchanging like-kind property (e.g., real estate for real estate). One attractive feature is the potential indefinite deferral of gains, providing flexibility for investors. However, there are strict requirements on the use of disposition proceeds, tracking, and reinvestment timing. It also presents challenges for partnership members who may not want to stick together on an exchange. More on 1031 exchanges can be found here.

QUALIFIED OPPORTUNITY FUNDS (QOF)

Section 1400Z-2 of the 2017 Tax Cut and Jobs Act introduced Qualified Opportunity Fund (QOF) investments, offering a different avenue for deferring capital gains from various assets, not limited to real estate. QOF investments can include appreciated stock and business interests, allowing investors to rebalance their portfolios without triggering significant tax events. When done correctly, a QOF investment can reduce taxable gains by up to 15% upon entering the deal and up to 100% upon exiting if the property is held for 10 years or more. While QOFs provide flexibility not found in a 1031 exchange in some instances, there are tradeoffs. QOFs require additional investment (“substantial improvement”) in a property, which is not mandatory in a 1031 exchange. Additionally, QOFs are geographically limited to designated census tracts and commit an investor to a property for 10 years to realize the full benefit of an Opportunity Zone investment. More on QOFs can be found here. For a detailed breakdown of deferral options, refer to the chart below (Source: CCIM Institute). *Note: Sterling CRE does not provide tax, legal, or accounting advice. Consult with your attorney, CPA, or tax counsel for advice tailored to your situation.* In conclusion, whether considering 1031 exchanges or Qualified Opportunity Funds in Missoula, Bozeman, or elsewhere in Montana, it’s crucial to align your investment goals with the right deferral strategy. Contact commercial real estate advisors Matt Mellott or Claire Matten today to discuss your specific needs and discover the most suitable approach for your situation.
Matt Mellott
Matt Mellott, CCIM/SIOR

Maximizing Tax Benefits: Comparing 1031 Exchanges and Opportunity Zones in Montana

Matt Mellott
Matt Mellott | CCIM, SIOR
How Investors Can Use Opportunity Zones and 1031 Exchanges to Their Advantage Which one works best for your particular situation? In the past few years, much has been discussed about the potential opportunities for investors through Opportunity Zones, especially in cities like Missoula, Kalispell, Bozeman, and other locations across Montana. These designated Opportunity Zones have opened up new possibilities for investors that were not available in the past. For nearly 70 years, the IRC Section 1031 exchange has been a key driver of commercial real estate investment. Originating in the 1950s to incentivize the sale of farmland for more productive uses, the 1031 exchange has remained a central strategy for many investors to minimize tax exposure. However, there is some confusion regarding what an Opportunity Zone can mean for an investor and how it compares to a 1031 exchange. Both offer favorable tax treatment and the deferral of capital gains, but they differ significantly in terms of mechanics, benefits, and restrictions. To understand which one might work best for your situation, read on.

1031 EXCHANGE

A 1031 exchange (1031x) allows the deferral of capital gains and recapture tax when exchanging like-kind property (e.g., real estate for real estate). One attractive feature is the potential indefinite deferral of gains, providing flexibility for investors. However, there are strict requirements on the use of disposition proceeds, tracking, and reinvestment timing. It also presents challenges for partnership members who may not want to stick together on an exchange. More on 1031 exchanges can be found here.

QUALIFIED OPPORTUNITY FUNDS (QOF)

Section 1400Z-2 of the 2017 Tax Cut and Jobs Act introduced Qualified Opportunity Fund (QOF) investments, offering a different avenue for deferring capital gains from various assets, not limited to real estate. QOF investments can include appreciated stock and business interests, allowing investors to rebalance their portfolios without triggering significant tax events. When done correctly, a QOF investment can reduce taxable gains by up to 15% upon entering the deal and up to 100% upon exiting if the property is held for 10 years or more. While QOFs provide flexibility not found in a 1031 exchange in some instances, there are tradeoffs. QOFs require additional investment (“substantial improvement”) in a property, which is not mandatory in a 1031 exchange. Additionally, QOFs are geographically limited to designated census tracts and commit an investor to a property for 10 years to realize the full benefit of an Opportunity Zone investment. More on QOFs can be found here. For a detailed breakdown of deferral options, refer to the chart below (Source: CCIM Institute). *Note: Sterling CRE does not provide tax, legal, or accounting advice. Consult with your attorney, CPA, or tax counsel for advice tailored to your situation.* In conclusion, whether considering 1031 exchanges or Qualified Opportunity Funds in Missoula, Bozeman, or elsewhere in Montana, it’s crucial to align your investment goals with the right deferral strategy. Contact commercial real estate advisors Matt Mellott or Claire Matten today to discuss your specific needs and discover the most suitable approach for your situation.