A growing number of investors consider Qualified Opportunity Funds (QOFs) along with Delaware Statutory Trusts (DSTs) when researching a real estate investment with tax benefits. When it comes to opportunity zones, it’s important to evaluate your options. Make sure that you understand the potential risks and benefits so you make an informed decision on whether to move forward.
You’ve probably noticed that Opportunity Zones have become popular among both institutional and individual investors recently. Both options allow investors to defer capital gains taxes, but they have some key differences. The main difference between the Opportunity Zone vs. the DST is the type of real estate investments that qualify. A Qualified Opportunity Fund involves investing in an IRS-identified Opportunity Zone, an economically disadvantaged or distressed area. DSTs for 1031 exchanges do not have location-specific requirements but do have criteria for the replacement properties to qualify as eligible.
Here is a snapshot of the main differences and similarities between QOFs and DSTs when completing an exchange.
| Qualified Opportunity Fund (QOF) | Delaware Statutory Trust (DST) | |
| Primary Investment Objective | Speculative growth oriented redevelopment. | Non-speculative / Monthly cash flow. |
| Deferral of Capital Gain Tax | Deferred gains taxed on 12/31/2026. | May be deferred indefinitely. |
| Depreciation Recapture | The difference between your property’s purchase price and adjusted basis is taxed. | May be deferred indefinitely. |
| Step-Up in Basis | Investors who made investments in QOFs before December 31, 2021 were eligible for a 10% step-up in basis, and those who made investments before December 31, 2019 were eligible for an additional 5% step-up in basis. | Asset basis is stepped up to fair market value at time of death. |
| Eligible Gains Sources / Capital Other Than Cash | Short- and long-term gains on sale of most assets including securities in non-offsetting transactions. | Investment properties or real property held for productive use in a business or trade. |
| Investment / Replacement Limitations | Opportunity Zones have specifically identified boundaries. Funds must be invested in a QOF. |
Proceeds must be invested in income producing “like-kind” property. No location limitations within the United States. |
| Fund Sponsor Experience | Varies greatly, many with no related experience. | Varies greatly, almost all have verifiable track records. |
| Fund Sponsor Regulation Requirements | Minimal requirements with an evolving IRS guidelines. | Highly settled IRS guidelines and known regulatory environment. |
| Blind Pool / Identified Properties | Blind Pool – (Capital deployment is flexible as long as 90% of assets remain in an Opportunity Zone.) | Property or portfolio of properties clearly identified in the DST. |
Many of the key similarities and differences between these two investment options involve IRS regulations, eligible capital gains and deferment guidelines. Your decision on which option to pursue depends on your individual financial goals and requirements.
QOFs offer unique features that distinguish them from DST investments. Organized as corporations, Real Estate Investment Trusts (REITs) or partnerships, QOFs exist solely as a vehicle for Opportunity Zone investments. Individual investors, trusts, partnerships and estates can directly invest in the fund. To meet IRS requirements, a QOF must have 90% of its investments in an Opportunity Zone — if it adheres to the regulations, the fund can make investments on multiple qualified tracts.
Opportunity Zone investments come with inherent potential risk, but they also offer several advantages to consider. The key ways that QOFs can potentially benefit investors include:
Due to the relatively recent introduction of Opportunity Zones, much of the inherent risk is associated with the uncertainty surrounding regulation. Although there have been several rounds of clarification by the Treasury Department, Opportunity Zone qualification still depends on strict compliance with new, and sometimes ambiguous, regulations.
If a fund does not comply with these requirements, its favorable tax status may not be applicable, thus creating an unintended tax liability for the investor. Additionally, some states do not fully conform to the federal Opportunity Zone tax benefit, so there may be state capital gain tax consideration.
Also, it’s important to recognize that when investing in a QOF which is multi-asset, the sponsor has discretion over the allocation of funds. To better deal with multiple timelines, as funds come in, the sponsor can allocate funding to different projects.
Opportunity Zones provide investors with special tax benefits, but they also come with risks. It’s important to compare multiple funds to properly evaluate investment opportunities. That’s why 1031 Crowdfunding has created an Opportunity Zone marketplace, where you can compare and evaluate properties and build a customized real estate portfolio.
If you’re making a 1031 exchange and investing in a DST, it’s essential to identify a potential property within 45 days and close within 180 days. The law stipulates that the replacement property must be of “like-kind” market value to the relinquished one. Of course, you can also cash invest in a DST if you’re not looking to exchange properties. In either case, the 1031 Crowdfunding DST marketplace allows you to compare properties and build a customized portfolio.
At 1031 Crowdfunding, we provide turnkey solutions to reduce stress and save time on a 1031 exchange. We provide the resources and support our clients need to make investments suited to their financial goals.
Our team has over 115 years of combined experience in real estate and a combined 87 years of experience in securities. We provide exceptional client support throughout the duration of a DST 1031 exchange or Opportunity Zone investment, guiding you through initial property identification, paperwork and closing to ensure accuracy and efficiency.
Streamline the investment process when you partner with 1031 Crowdfunding and register to view all properties today.
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