Qualified Opportunity Zone (QOZ)
A Qualified Opportunity Zone is not a 1031 exchange but can be used in combination. In a QOZ, you do not have to invest your total proceeds, only the gain. Most importantly, you are not avoiding the tax, as a 1031 exchange, you are deferring the tax. The most attractive feature of the QOZ is that it does not only apply to Real Estate – any capital gains from the sale of any type of investment can be deferred. QOZs are generally preferred if you have a high basis in the relinquished asset.
A QOZ fund will invest into real estate in which the property will be developed into a larger project, such as a multi-family investment, hotel, or office building. The original capital gains taxes are deferred until the 2026 tax year, at which point the property generally has a financing event following completion of construction, and proceeds are paid out to the investor in order to pay the tax bill for tax year 2026. The remaining investment grows tax deferred and upon a 10 holding period, all capital gains are erased and the remaining investment is tax free upon liquidation with no further regulation or requirement of the funds.
- Any asset with a capital gain is eligible
- Investment becomes 100% tax free after 10-year hold
- Original basis of investment can be returned, only the gain needs to be re-invested
- Typically, no income while under development
- Only defers taxes, does not avoid them like 1031 exchange