Learn the pros and cons of each investment tool and choose the one that’s right for you.

If you have generated capital gains from investing in real estate this year—congratulations!

But before paying any tax on that capital gain, you probably want to know about two popular strategies to minimize your tax liability by reinvesting.

Traditionally, a 1031 exchange has been one of the most tax-efficient ways for real estate investors to reinvest. However, investors now have another choice with the introduction of Opportunity Zones, a program that was created as part of the Tax Cuts and Jobs Act of 2017.

Here’s what you need to know about how a 1031 exchange compares to a Qualified Opportunity Zone investment so you can best leverage each for additional gains and tax advantages.

What Are 1031 Exchanges and Opportunity Zone Funds?

1031 exchanges, also called like-kind exchanges, enable you to defer the capital gains tax on the sale of a property by using the proceeds from the sale to reinvest in a new one. The process is sometimes referred to as “swapping,” and it allows you to preserve the gross equity earned from an investment property to increase your buying power.

Opportunity Zone funds are investment vehicles that allow you to defer the capital gain tax due on the sold asset through the end of 2026, reduce the capital gains tax owed on that same asset if you hold the new asset for a minimum of five years, and eliminate any capital gains tax on the new Opportunity Zone investment if the asset is held for at least 10 years. 

1031 Exchanges vs. Opportunity Zone Funds: Which One Offers Better Tax Advantages for Real Estate Investors?

There are various regulations and conditions that affect the ease and feasibility of leveraging 1031 exchanges or Opportunity Zone funds for tax benefits. Here are some key considerations:


In essence, a 1031 exchange is a “swap” of one property for another. It requires you to invest both the principal and the capital gains within 180 days of the sale of a property. The challenge is that you need to find a “like-kind” property in which you can invest , and it may not be a feasible option within such a narrow time frame. 

As such, the IRS allows for a non-simultaneous or “Starker” exchange during which you can purchase a property through a qualified intermediary. Starker exchanges are popular among investors because they don’t have to go through the logistics of finding a “like-kind” swap. However, you’d incur a fee to engage the service of the intermediary.

On the other hand, with an Opportunity Zone fund you only need to reinvest the capital gain (instead of principal of the initial investment plus the profits) from the sale of a property within 180 days to qualify for tax benefits. You can invest in Opportunity Zone funds directly and eliminate the middleman. As such, the buying and selling process is more streamlined and is likely to carry lower transaction costs and fees.

Conclusion: Opportunity Zone funds offer more flexibility and usually have lower costs. You can also keep the principal from your initial investment and use it for other purposes and still take advantage of the Opportunity Zone program tax benefits.

Qualified Assets

1031 exchanges can only be applied to real estate investments. You can’t use them to receive tax benefits for profits from the sales of other appreciated assets, such as stocks, bonds, cryptocurrency, a business, artwork, etc. As such, they don’t allow you the convenience of consolidating capital gains from different asset types into one investment vehicle for tax benefits.

Meanwhile, Opportunity Zone funds allow you to defer and lower the capital gains tax from the sale of almost any asset type, giving you more flexibility and diversification potential.

However, since Opportunity Zone funds are designed to incentivize investment in economically distressed areas (i.e., Opportunity Zones), the property you invest in must be located in one of those regions. As such, you need to choose the location of your investment property carefully to increase the potential of a high return.

Conclusion: Opportunity Zone funds are a better choice if you don’t want to lock up your initial principal and profits indefinitely. They allow you to defer any capital gains tax liability from various asset types, not just real estate, for up to seven years.

Capital Gains Tax Reduction

While a 1031 exchange allows you to indefinitely defer the capital gains tax, it doesn’t reduce the tax owed. In order to continue receiving the tax benefit, you have to keep swapping properties for years or decades until you eventually dispose of an asset either through a traditional sale or inheritance and estate planning.

On the other hand, an Opportunity Zone fund allows you to defer paying capital gains taxes on the initial gain through the end of 2026 and lower your tax bill when it comes due. If you hold the Qualified Opportunity Zone investment for at least five years you can reduce the capital gains tax liability by 10%, and if you hold it for at least seven years, you can reduce the tax liability by 15%.

Remember, you have to invest by the end of 2019 in order to receive the maximum 15% reduction in the original capital gains tax due.

Conclusion: With Opportunity Zone Funds, you don’t have to worry about finding a suitable replacement asset of comparable value to avoid additional taxes. You’ll be able to maximize the tax benefit by tailoring the amount you invest to match the exact amount of capital gains you have realized in the past 180 days.

Are Opportunity Funds Right for You?

An Opportunity Zone Fund is right for you if:

  • You’re a passive investor aiming to diversify your portfolio through a professionally managed pool of funds
  • You have capital gains from one or more appreciated assets and want the convenience of rolling all the profits into one investment vehicle and deferring and eliminating tax burdens
  • You want access to the initial principal
  • You have a medium-term time horizon and want access to the capital gains from the original investment in a few years while paying a reduced capital gains tax

Want to learn how to reduce your capital gains tax by investing in Puerto Rico? 

Lifeafar successfully completed the funding of Plaza Colón Hotel & Suites in 2019

Complete the information below to learn more about our current Qualified Opportunity Zone investment opportunities in Puerto Rico with a projected pre-Opportunity Zone investment IRR of 16-19%.

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