For years, Code § 1031 has been a popular way to defer taxation on the sale of capital gain assets. However, Code § 1031 has significant requirements, including complex timing and identification requirements and a requirement that the capital gain asset be exchanged with “like kind” property that, as of the enactment of the so-called Tax Cuts and Jobs Act in 2017, must be real property. With the enactment of Code §§ 1400Z-1 and 1400Z-2 in the Tax Cuts and Jobs Act, the ability to defer current capital gains (and potentially avoid taxation on future appreciation) by investing in real property in a Qualified Opportunity Zone has expanded options for taxpayers with capital gains. The following chart compares the requirements, pros, and cons of Code § 1031 Like Kind Exchanges and Code § 1400Z-1 Qualified Opportunity Zones.
| § 1031 Like Kind Exchanges | § 1400Z-1 Qualified Opportunity Zones | |
| Relinquished Property – Character and Use |
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| Replacement Property – Character and Use |
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| Does replacement property have to be “like-kind” to relinquished property? |
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| Identification requirements for replacement property? |
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| Acquisition of replacement property |
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| Proceeds that must be rolled over into qualifying investment |
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| Taxpayer vs. Property Analysis |
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| Partnership or LLC interests |
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| Stock in corporations |
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| Additional Capital Requirements |
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| Timing of inclusion of deferred gain |
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| Reduction in deferred gain inclusion through basis step-up |
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| Timing of inclusion of gain over and above deferred gain |
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| Related parties |
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