1031 Exchanges & Qualified Opportunity Zones

What are 1031 Exchanges?

1031 Exchanges are a way for real estate investors to defer capital gains taxes when selling one property and buying another. It should come as no surprise this is often called “swapping”—as that’s essentially what you’re doing, swapping one property for another. With a 1031, you get to keep all the gross equity from your investment, strengthening your purchasing power.

What are QOZs?

Both 1031s & QOZs (Qualified Opportunity Zones) are similar, but focused on building up underserved communities. Rather than rolling over capital gains into a new property, they use it to revitalize communities in need. The play is mutually beneficial—investors reap tax benefits while underserved communities receive a capital injection. There are over 8,700 QOZs across the United States, so there are plenty of opportunities.

What are the advantages of 1031 Exchanges and QOZs?

Both 1031’s & QOZs leverage tax advantages. 1031s allow participants to take part in capital gains tax deferral, until the replacement property is sold without using a 1031 exchange. QOZs, on the other hand, provide actual tax reduction: 10% after 5 years, 15% after 7 years, and 100% of the future appreciation, after 10 years. However, a 1031 doesn’t have any construction requirements, whereas a QOZ must at least improve on the property with a construction project, if not build one from the ground up.

How do investors access 1031 Exchanges and QOZs?

While the prospect of investing in an underserved community with tax advantages may sound like a complex financial instrument reserved for the “ultra-rich,” retail investors can partake in both 1031s and QOZs, with the right assistance.

HUDSONPOINT Capital provides access to a variety of alternative investments, including 1031 Exchanges and QOZs. We democratize the investment process by pooling together the combined capital of our clients. This allows retail investors to take part in investments that would otherwise be inaccessible.

Understanding the risks

It’s important to keep in mind that investing in 1031s and QOZs carry risk that can exceed traditional real estate risk. Those who invest in QOZs must have an especially strong risk tolerance, as underserved communities are typically economically distressed areas that may require significant time to become profitable (if they ever do). It’s advised that investors take a long-term view when it comes to investing in QOZs. There are material risks associated with investing in real estate securities including illiquidity, vacancies, general market conditions and competition, lack of operating history, interest rate risks, general risks of owning/operating commercial and multifamily properties, financing risks, potential adverse tax consequences, general economic risks, development risks and long hold periods. There is a risk of loss of the entire investment principal.

It is not intended and should not be construed or relied upon as legal or tax advice. No tax benefits are guaranteed as a result of investing in a Qualified Opportunity Fund. Potential investors should consult their tax advisers with respect to the U.S. federal income tax consequences of an investment in a Qualified Opportunity Fund.


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