On July 31st, VENTURE.co’s Managing Director, Trevor Nesbit was joined by panelists from RCX Capital, Asset Preservation, and VENTURE.co for ‘Tax Advantaged Real Estate: 1031’s versus Opportunity Zones’. The webinar panelists included Jean-Louis Guinchard, Managing Principal at RCX Capital Group, LLC., Dino Champagne, Vice President at Asset Preservation, Inc., and Brad Blazer, Director of National Accounts at VENTURE.co.
When investors sell appreciated assets, particularly real estate, they face a choice: to pay capital gains tax or to implement a tax mitigation strategy. While Opportunity Zones and 1031s both offer the ability to invest on a tax-deferred basis, these vehicles have different features and requirements. For instance, some offer income immediately, while others do not. All of the panelists agreed that it is vital to align tax-advantaged investments with investor objectives in a customized, product-agnostic way.
Jean-Louis began the conversation by saying, “1031 exchanges have been one of the most efficient tax-advantaged investment, wealth transfer, and estate planning vehicles available to real estate investors for decades.” Investors must invest 100% of the proceeds from the sale of real property – that’s the capital gains plus the basis – into “like-kind” property to defer paying capital gains and depreciation recapture taxes.
JL continued, “Unlike 1031 exchanges, Qualified Opportunity Funds (QOF) require investors to invest only their capital gain to get the tax benefit… These can be capital gains on any asset: stocks, bonds, the sale of a business etc. QOFs also offer a way to eliminate capital gains made from QOFs under certain conditions.”
The discussion throughout the webinar covered the most important elements of section 1031 exchanges and Qualified Opportunity Zone Funds. When polled, more of the audience said that tax deferral was their most important objective (28%) – even higher than tax reduction (19%) and underlying investment terms (12.5%) – when assessing tax-advantaged vehicles.
Brad explained, “I think all the buzz and excitement about opportunity zones is that they are really looked at as an economic development tool. That is, they were designed to spur economic development and job creation in distressed communities… It also opens the door to defer gain on other investments outside of real property, such as from highly appreciated positions in stock portfolios.”
Dino led the 1031 section of the webinar and touched on some of the most important elements of a 1031 exchange. Dino and Brad went in depth into the exchange period guidelines, financing limitations, the types of exchanges, and the assets that qualify as “like-kind”.
Dino pointed out, “There are limitations in the Opportunity Zones and one of the key things is the geographic limitations. When you are going into an Opportunity Zone it is in specific areas. When you are doing a 1031 you still have the entire country. The other big difference is the holding period requirement.”
For the majority of 1031 exchanges, there is no holding requirement, even though some advisors may recommend a two to seven year holding horizon. For QOFs, a hold period of ten years is required by statute to get the maximum tax benefit.
Opportunity Zone Funds
Jean-Louis led off the Opportunity Zone section by saying, “These QOFs are similar to a 1031 exchange and have a compounding effect on the original investment, which benefits not only investors but the communities they invest in.”
There are three potential tax benefits:
- Deferral of capital gains
- Reduction of tax on deferred gains, and
- The ability to eliminate potentially all capital gains taxes on any future gain and income from the QOF investment if you hold the asset for more than ten years.
The panelists went through the key components of QOFs and focused on the major divergences from 1031 exchanges. One salient difference is that QOFs are not required to invest in real estate but can also invest in Qualified Opportunity Zone Businesses.
All the panelists agreed that it takes significant expertise to choose which investment is right for an individual investor. Aspects of opportunity zones are more versatile than 1031s, but other aspects are more restrictive, such as the long holding requirement to get the tax benefits.
Nothing can replace the client-specific advice that would come from a tax professional or financial advisor when assessing the differences in these two vehicles.
A question from the audience about Opportunity Zones was “How can I roll over stocks with capital gains to a QOF?” Jean-Louis answered, “First and foremost make sure you get good competent tax advice, obviously the devil is in the details, and it is difficult to say what an individual’s specific circumstances are. It is relatively easy, essentially you have to put in a self-certification gain deferral with your taxes, and you just have to make sure you hit that 180 day time frame for reinvestment of the gain into a QOF.”
The Best Ways to Access Tax-Advantaged Vehicles
RCX Capital Group has deep expertise in tax-advantaged real estate products and have advised on such transactions for decades. Ensenia Wealth, a subsidiary of RCX Capital, leverages their expertise and product-agnostic approach to equip financial advisors with tools to become more comprehensive in their planning with their clients. RCX Capital’s broker-dealer works with top quality sponsors, bringing access to institutional quality real estate investments through 1031 and Opportunity Zone offerings. Asset Preservation is a 1031 exchange intermediary which facilitates a wide variety of 1031 exchanges.
“If you take anything away from today’s discussion, I just can’t stress how important it is to discuss and get this in front of your clients as soon as possible, well before they contemplate their real estate (or capital asset transaction). Individuals who fail to plan adequately and get a good team of advisors around them will quickly lose one of the best opportunities that they have had in years.” Wise words to end on, by Jean-Louis Guinchard.
If you are interested in learning more about tax-advantaged investment opportunities please reach out to firstname.lastname@example.org, who will put you in touch with an appropriate Registered Representative.
Click here to watch the webinar on-demand.
This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. It does not provide that necessary customization of advice, tailored to a client, which would be provided by an accountant or tax lawyer. The views and opinions expressed in this article are those of the author’s and do not necessarily reflect the official policy or position of VENTURE.co Holdings, Inc.