1031 Exchanges vs. opportunity zone investments
Evaluating and comparing tax strategies for financial professionals.
1031 Exchanges vs. Opportunity Zone investments
For financial professionals advising clients with significant capital gains, understanding the nuances between 1031 exchanges and opportunity zone (OZ) investments is essential. Both strategies offer powerful tax deferral potential—but differ in structure, flexibility, and long-term benefits.
Key similarities.
1031 exchanges and qualified opportunity Funds (QOFs) share some foundational features:
- Capital gains deferral: Both allow deferral of gains from the sale of prior investments.
- Real estate exposure: While QOFs can include businesses, both are commonly used to reinvest into real estate—an asset class with low correlation to public markets.
- Economic development: Both channels encourage reinvestment and support economic activity, either broadly (1031s) or in targeted areas (opportunity zones).
Key differences.
Type of capital gain
- 1031 exchange: Only real estate qualifies, and the reinvestment must be “like-kind” real estate.
- Opportunity zones: Gains from any capital asset—real estate, stocks, and business interests can be reinvested.
Deferral timeline and deadlines
- 1031 exchange: Taxes on capital gains are deferred indefinitely if gains are continuously reinvested into qualifying like-kind properties.
- Opportunity zones: Taxes on capital gains can be deferred until December 31, 2026, or until the OZ investment is sold, whichever comes first.
Tax treatment of gains
- 1031 exchange: The original basis carries forward indefinitely. Taxes are owed when a property is eventually sold for cash.
- Opportunity zones: If held for 10+ years, any appreciation in the OZ investment itself is excluded from capital gains taxes. A 10% basis step-up for five-year holds was part of the original OZ program but expired in 2021. New legislation introduced in 2023 proposes reinstating this benefit, but it has not been passed into law as of 2025.
Geography and investment flexibility
- 1031 exchange: Can be used with virtually any investment or business-use real estate, as long as it meets the like-kind rule.
- Opportunity zones: Must be located in designated opportunity zone, but with over 8,700 zones across the U.S., options remain broad. QOFs can also invest in operating businesses, not just real estate, offering a unique diversification angle.
Policy proposal landscape
- 1031 exchange: The Biden administration's 2025 budget proposed a $500,000 cap on deferrable gains, representing a significant potential shift for high-net-worth clients. This proposal, included in the Treasury’s Green Book, has not been enacted into law.
- Opportunity zones: Recent bipartisan proposals aim to extend deferral deadlines, reinstate step-up incentives, and increase transparency through impact reporting. However, these changes remain under consideration.
When should financial professionals consider each strategy?
| Client profile | Potential best fit | Rationale |
|---|---|---|
| Real estate-heavy investor seeking ongoing deferral | 1031 exchange | Familiar, proven strategy; potentially indefinite deferral and estate step-up benefits |
| Investor with gains from equities or business sale | Opportunity zone | Allows reinvestment from broader asset base |
| Client seeking long-term, tax-free growth | Opportunity zone | 10-year hold offers full exemption on appreciation |
| Legacy planning and step-up in basis | 1031 exchange | Current rules preserve full basis step-up for heirs |
| ESG/impact-focused investors | Opportunity zone | Aligns with impact goals and federal policy priorities |
While both tools provide compelling tax deferral opportunities, they are structurally distinct and best suited to different types of investors. Financial professionals should pay close attention to the evolving policy environment—especially around proposed 1031 exchange limitations and potential enhancements to opportunity zones. For clients with significant capital gains and long-term horizons, these strategies remain critical tools in tax-aware investment planning.
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Important Information
This information is based on the views of, and provided by, SEI Investments Management Corporation (SIMC), a registered investment adviser and wholly owned subsidiary of SEI Investments Company. This information should not be relied upon by the reader as research or investment advice or recommendations (unless SIMC has otherwise separately entered into a written agreement for the provision of investment advice regarding the subject matter of this material).
Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.