Qualified Opportunity Zone Funds are relatively recent investment vehicles whereby investors can place capital gains (within a certain timeline of selling) into real estate investments.
Generally speaking, they’re great investment options that offer the same benefits as that of the 1031 exchange. Through the Tax Cuts and Jobs Act, certain areas that have been mandated as Opportunity Zones according to the IRS as “an economically distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.”
What this essentially means is that a qualified opportunity zone fund can invest in any real estate property that is located within a designated “opportunity zone” – an underserved area or one that needs economical uplifting. But there are a couple of critical points to consider in this type of investment vehicle. First and foremost, it may pose a risk as it entails investment in an area that needs development. Secondly the investment period may be lengthy which means that the capital may be typically held in this type of fund for a long duration, even 10 years.
It should be noted though, that Opportunity Zones are not necessarily used as a 1031 exchange, but rather another option in the case of a failed 1031 exchange or a potential tax-deferral tool for other investments with gains such as stock or the sale of a business.