Rolling Real Estate Gain into a Qualified Opportunity Fund: Comparison with § 1031
Tax Management Real Estate Journal, Vol. 34, p. 155, (Sep. 5, 2018)
13 Pages Posted: 6 Sep 2018 Last revised: 20 Sep 2018
Date Written: August 29, 2018
As part of the 2017 Tax Cuts and Jobs Act, Congress enacted Section 1400Z-2, which allows property owners to reinvest gain from the disposition of property in qualified opportunity funds (QOFs) tax free. This article illustrates how this new provision is different from the most popular commercial real estate disposition nonrecognition provision—Section 1031. Section 1400Z-2 is attractive because it not only defers gain recognition, it allows property owners to exclude any post-acquisition gain that accrues by holding the property for at least 10 years. Section 1031 now only applies to real property, so property owners have greater re-investment alternatives in QOFs. The article also recognizes that Section 1400Z-2 does not appear to have been fully vetted, so it comes with some mistakes and many open issues. Looking past those shortcomings, the article presents a numerical example comparing a hypothetical Section 1031 exchange into real property to a reinvestment of gain into a QOF. That comparison shows that 10 years following the reinvestment, the property owner would be better off under the Section 1400Z-2 regime than under Section 1031.
Keywords: qualified opportunity fund, QOF, section 1031, nonrecognition, gain deferral, gain exclusion.
Suggested Citation: Suggested Citation