Many investors consider Qualified Opportunity Funds (QOFs) along with Delaware Statutory Trusts (DSTs) when researching a real estate investment with tax benefits. A DST allows investors to hold a fractional interest in a trust managed by a professional real estate company. A Qualified Opportunity Fund is an investment opportunity created by the Tax Cuts and Jobs Act of 2017. It offers tax incentives for investors who make private and long-term investments in opportunity zones. Although this investment is alternatively called Qualified Opportunity Zone Fund or opportunity zone fund, a Qualified Opportunity Fund refers to the vehicle used to invest in opportunity zones.
An opportunity zone in real estate is a community or region where investors can follow program requirements to start an investment project to ultimately defer capital gains taxes. The United States has thousands of opportunity zones designated for economic challenges. When it comes to opportunity zones and DSTs, 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.
QOFs and DSTs allow investors to defer capital gains taxes, but they have some key differences. The main difference between the opportunity zone fund versus 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 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 investment:
| 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.
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. QOFs exist solely as a vehicle for opportunity zone investments and can be organized as corporations, Real Estate Investment Trusts (REITs), or partnerships. 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 risks, 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 considerations.
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.
Since opportunity zones are typically designated in economically depressed areas, investing in a QOF can be speculative.
DSTs offer several advantages for investors to consider, including:
Delaware Statutory Trusts have inherent risks common with many real estate investments, including loss of principal and minimal to no returns. Some other possible risks for investors to consider include:
Opportunity zones provide investors with special tax benefits, but they also come with risks. Likewise, 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. You can also cash invest in a DST if you’re not looking to exchange properties.
It’s important to compare multiple funds to properly evaluate investment opportunities. That’s why 1031 Crowdfunding has created an opportunity zone and DST marketplace where you can compare and evaluate properties and build a customized real estate portfolio.
At 1031 Crowdfunding, we provide turnkey solutions to reduce stress and save time on researching and investing in QOFs and DSTs. By partnering with us, you will get the resources and support you need to make investments suited to your financial goals. Our team provides 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.
This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements are speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.
