One year after a global lockdown triggered by the COVID-19 outbreak, the United States federal government has continued to be supportive towards stimulating the economy through aids for eligible businesses, schools and towards vaccine production and distribution. The pandemic has kept a lot of investors on their toes due to an increase in market volatility. Coupled with these happenings, there have been various speculations on the impact of the new Biden administration policies–– which officially began on January 20, 2020, on the economy.

If you invest in real estate through Qualified Opportunity Zone Funds (QOZF) or thinking to invest in Qualified Opportunity Funds (QOFs), you would most likely be concerned about how the recent economic situation would impact your returns, taxes and investment opportunities.

Basic Requirements for QOF investments

The 2017 Tax Cuts and Jobs Act (TCJA) provided an opportunity for investors to contribute towards developing economically distressed communities through Qualified Opportunity Zone (QOZ) investment opportunities. Generally, these communities are nominated by a state, the District of Columbia, or a U.S. territory. Some basic requirements for investments through qualified opportunity zone funds and qualified opportunity zone businesses are :

180-Day Investment Requirement for QOF Investors

This requirement mandates taxpayers to invest gains from property sale in a QOF within a 180-day window starting from the date of the sale or exchange in order to qualify for capital gains tax deferral provided that the gain does not exceed the aggregate amount invested by the taxpayer in the Qualified Opportunity Fund. 

30-Month Substantial Improvement Period for QOFs

For a tangible property to qualify as an opportunity zone business property, it has to be used in a trade or business of the QOF and satisfy the substantial improvement requirement. This requirement provides that the original use of tangible property in the qualified opportunity zone acquired after 2017 must begin with the QOF or the QOF must substantially improve that property. Meeting the substantial improvement requirement is contingent on the additions to basis –– with respect to the qualified opportunity fund property –– held by the QOF during any 30-month period beginning after the date of acquisition, exceeding the adjusted basis of that property at any period starting from the 30-month substantial improvement period.

90-Percent Investment Standard for QOFs

A QOF as an investment vehicle could be a corporation or a partnership for the purpose of investing in qualified opportunity zone property and not another QOF. The ninety-percent investment standard requires a QOF to hold at least 90 percent of its assets in qualified opportunity zone property.

The average percentages of the QOF’s qualified opportunity zone property on the semi-annual testing dates must equal at least 90 percent of the QOF’s assets. If a QOF fails to meet this requirement and the average of the percentages of its qualified opportunity zone property on the testing dates does not equal at least 90 percent of the QOF’s assets, they would be subject to a penalty for each month it fails the requirement. If the failure is due to a reasonable cause, the penalty may not be imposed.

Working Capital Safe Harbor for Qualified Opportunity Zone Businesses 

For Qualified Opportunity Zone Businesses (QOZB), there is a requirement to have less than five percent of the average of the properties aggregate unadjusted bases attributable to non-qualified financial property excluding some certain working capital assets such as cash and cash equivalents from non-qualified financial property or reasonable amounts of working capital that are held in cash, cash equivalents, or debt instruments with a term of 18 months or less. 

A working capital safe harbor was provided for QOZBs to allow for treating certain amounts of working capital as reasonable provided certain requirements are met. Through a written schedule, a QOZB  can be allowed to utilize the expenditure of the working capital assets within 31 months of receiving the assets.

However, the working capital safe harbor period can be extended to a maximum 62-month period for certain reasons such as, if the qualified opportunity zone business is in a qualified opportunity zone within a federally declared disaster. Then, the qualified opportunity zone business may have additional time to a maximum of 24 months to use its working capital assets, subject to meeting the working capital safe harbor requirements. Given this, a qualified opportunity zone business located in a qualified opportunity zone, within a federally declared disaster, may have up to a maximum 86-months to expend reasonable working capital assets.

12-Month Reinvestment Period for QOFs

Selling off or disposing some or all of the qualified opportunity zone property in a QOF would result in proceeds or possible capital gains. If some or all of the proceeds in qualified opportunity zone property is invested by the QOF by the last day of the 12-month period from the date of the sale, or disposition, the reinvested proceeds can be treated as qualified opportunity zone property towards fulfilling the ninety-percent investment standard. This also applies if there is a distribution of the QOF’s qualified opportunity zone stock that qualifies as a return of capital.

However, there are requirements that need to be met for this treatment to be applicable in QOFs. The period before the proceeds from the sale, disposition or distribution is reinvested in qualified opportunity zone property, they have to be continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less. If any reinvestment plans in a qualified opportunity zone property is delayed as a result of a federally declared disaster, the QOF may get additional time up to a maximum of 12 months to reinvest the proceeds, subject to the QOF sticking to  the original investment plan. 

What’s new for investments in Qualified Opportunity Funds and Qualified Opportunity Zone Businesses

In response to the difficulties faced by many investors, the Internal Revenue Service (IRS) released the Notice 2021-10 on January 20, 2021. This release extended the relief for QOFs and their investors initially provided by Notice 2020-39 and also provided additional relief to help navigate around the requirements for the QOFs. The relief extensions are automatic and investors are not required to process any documentation.

180-Day Investment Requirement for QOFs

The released Notice 2021-10 provided an extension for the 180-day investment window for QOF investors until March 31, 2021. This enabled investors who had the last day of the 180-day window to invest their eligible gains from sale proceeds fall between any time from April 1, 2020, through March 31, 2021 have the opportunity to still invest in QOFs. Although this relief is automatic, as an investor in QOFs, you will be expected to make a valid deferral election on your federal income tax return –– including extensions, for the applicable tax year that the gain is expected to be recognized.

30-Month Substantial Improvement Period for QOFs and Qualified Opportunity Zone Businesses

As regards the 30-month substantial improvement period, If you hold a QOF property or qualified opportunity zone business property, the Notice 2021-10 relief allows that the period from April 1, 2020, and March 31, 2021 be disregarded in determining any 30-month substantial improvement period.

With the substantial improvement requirement, investors in QOFs are required to make improvements on a QOF property that increase their adjusted tax basis in the improved property within a 30-month window. The  Notice 2021-10 relief essentially provides more time for investors to improve their QOF property and qualify for possible tax benefits. 

90-Percent Investment Standard for QOFs

Under Notice 2021-10, if an investment in QOF has the last day of the first six-month period of a taxable year or the last day of a taxable year fall between the period of April 1, 2020, and June 30, 2021, failure by the QOF to satisfy the ninety-percent investment requirement for the applicable tax year is considered to be from a reasonable cause. This relief is also automatic and requires that the QOF fill all lines on Form 8996 completely with respect to each affected taxable year. The completed Form 8996 would need to be filed with the federal income tax return (including extensions) for the affected taxable year(s).

Working Capital Safe Harbor for Qualified Opportunity Zone Businesses

The Notice 2021-10 relief provides that Qualified Opportunity Zone Businesses with working capital assets that are planned to be covered by the working capital safe harbor before June 30, 2021, receive not more than an additional 24 months. This extension includes any relief provided under the previously provided relief in Notice 2020-39 and allows for a maximum safe harbor period up to 55 months and in the case of start-up businesses, up to 86 months subject to the requirements of the working capital safe harbor.

12-Month Reinvestment Period for QOFs

Following the existing 12-month reinvestment period requirement, if your investment in qualified opportunity funds has a 12-month reinvestment period that includes June 30, 2020, your QOFs would receive not more than an additional 12 months (including any relief provided under Notice 2020-39). This essentially means a combined maximum reinvestment period of not more than 24 months to reinvest some or all of the proceeds received by the QOF either in the form of a return of capital or the sale or disposition of some or all of any qualified opportunity zone property, in qualified opportunity zone property. The condition that the QOF invests the proceeds in the manner originally intended before June 30, 2020 still applies. 

In conclusion

These changes and updates for investments in QOFs may seem like a lot to process and implement, therefore it is advisable to employ the services of professional tax experts and accountants to provide clarity and more information that make it possible to maximize any potential tax benefits and opportunities.

Contact the Stax Capital team for more information on investments in qualified opportunity zone funds and businesses.

Alternative investments are often used as a means for portfolio diversification. Individual investors can invest directly in alternative investments or through mutual funds that include alternative assets in their portfolio mix.

While there are different types of alternative investments, there are some investments that are specific to the real estate industry. You will need to understand how an alternative investment fits into your overall financial plan and investment goals before you decide on which option is best for you.

What Are Alternative investments?

Alternative investments are typically investments in assets that are not considered to be conventional. Conventional investment assets include, stocks, bonds, government bills, money market assets, amongst others. On the other hand, most non-traditional investments such as investments in commodities, real estate, venture capital, hedge funds, etc. involve complex procedures and processes that need high levels of professional knowledge and competence. These types of investments are called alternative investments.

Generally, most alternative investments are only accessible to accredited investors with high net worth. According to the Security Exchange Commissions (SEC), individuals can be classified as accredited investors based on their annual income, net worth and professional experience or knowledge. This would generally include individual Investors with income more than $200,000 for two most recent years and expected to at least remain in this income band for the current year. For organizations, they would need to own assets with total value greater than $5,000,000. This is alongside other requirements that need to be met to qualify as accredited investors than can invest in alternative assets.

Also, due to the complexity of alternative investments and lesser regulations, alternative investments are often held by investors who are knowledgeable about the market dynamics peculiar to their non-conventional nature. For individuals who do not have adequate knowledge on alternative investments, they employ the services of professionals such as financial advisors, investments specialists, accountants and tax experts.

Majority of alternative investments are not registered with the Securities Exchange Commission (SEC) and as such, are not publicly traded on the financial market. This provides a good explanation for why most alternative investments are highly illiquid in nature.

Alternative investment options

Alternative investments provide different options for investors who want to explore possible returns from non-conventional assets. Some of these options include:


Commodity investments involve buying commodities such as metals –gold, copper, agricultural products or natural gas and oils etc. Most investors invest in commodities directly and/or through commodity Exchange Traded Funds (ETFs) or mutual funds.

Private Equity:

Investors through private equity funds can invest in privately held companies for equity in these companies. This is usually with the aim to sell their shares in the company for profit at a later time. Most private equity investments transactions are carried out by investment firms.

Hedge Funds:

These are complex investment vehicles that usually function by pooling cash resources from accredited investors. Hedge funds are managed by registered financial and investment advisors. Hedge fund managers employ calculated investment strategies with the aim to make high returns from the market.

Real estate investment: 

Alternative investments in the real estate market are of different forms and types. The most commonly explored options include real estate investment trusts (REITs), tenancy in common (TICs), Delaware Statutory Trusts (DSTs). Direct purchase investments such as buying properties to flip and sell also qualify as real estate alternative investments.

Other forms of alternative investments include cryptocurrency, foreign exchange (FOREX), private debt funds and financial derivates —such as futures, options and forwards, amongst others.

Alternative Investments for Real Estate Investors

Real Estate Investment Trusts:

Commonly known as REITs, Real estate investment trusts can either be publicly traded through the stock exchange market or privately. Publicly listed REITs are usually registered with the Security Exchange Commission.

When you invest in REITs, you generally would purchase shares in a real estate company that owns several properties. These properties can either be retail, commercial or residential. Investments in REITs are done through equity REITs, Mortgage REITs or a combination of equity and mortgage REITs, also known as, hybrid REITs.

Using the REITs vehicle, investors can earn rental income through dividends from their interests in the REIT companies.

Qualified Opportunity Funds:

Qualified Opportunity Funds (QOFs) are investment vehicles set up for the purpose of investing in Qualified Opportunity Zones. Investments in Qualified Opportunity Funds provides possibilities for real estate investors to become eligible for tax benefits. These potential benefits generally come in three forms:

Capital gain deferral: Eligible capital gains such as gains from property sale can be deferred if reinvested in a Qualified Opportunity Fund.

Capital gain reduction: The step-up basis for investment in Qualified Opportunity Fund allows investors to reduce capital gain recognized on your interest in the QOF when sold or exchanged after at least five years of holding it.

Capital gain elimination: Capital gains from qualified investments in a Qualified Opportunity Fund may be eligible for total tax elimination when held for at least 10 years.

Delaware Statutory Trusts:

Accredited investors can buy fractional units in institutional quality properties through Delaware Statutory Trusts. A great advantage this potentially provides for investors is that they can defer tax gains on property sale when they make eligible investments in DSTs. This is possible because DST investments qualify as 1031 exchange subject to other requirements being met.

Delaware Statutory Trusts work through the management of the sponsors and trustees or managers who oversee the property investment activities under the trust. You can become a beneficial owner in the trust by purchasing investment interest. These ownership interests in the DST would provide you with distributed income from the trust based on the fraction of your investment in the trust.

There are other forms of real estate alternative investments such as crowdfunding investments. This involves pooling money from many investors to invest in highly valued properties. There is also the tenancy in common (TIC) form of real estate investment that involves the ownership of real estate property by two or more people. 

Pros of Alternative Investments

Portfolio diversification: One of the most attractive attributes of alternative investments is the outlet it provides for investors to put their money into assets that are not directly correlated with the common financial markets.

Stock markets and bond markets are inversely related. When the stock prices go up, bond yields decline and vice versa, when the bond market performs outstandingly, the stock market tends to dip. Due to this, investors look for other investment vehicles that do not go through the frequent booms and dooms of conventional financial assets. This is where alternative investments may provide value.

It is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.

Possible returns: When you invest in alternative investments, you do so to take advantage of potential returns. Like every other form of investment, alternative investments can provide possible returns for investors. However, returns are not guaranteed.

Lack of volatility: Alternative investment options may not be as volatile as traditional investments. The prices and values of alternative assets typically do not fluctuate easily as other conventional asset prices.

Tax Benefits: Some alternative forms of investing provide investors with the possibility of deferring tax and other tax benefits. One of such alternative investment vehicles in the Delaware Statutory Trust which allows investors to defer capital gains for transactions that qualify as 1031 like-kind exchange.

Cons of Alternative Investments

Alternative investments are not all rosy, they have associated downsides to them. The cons of investing through alternative investments should be considered carefully before delving into the complex world of this non-traditional space of seeking possible returns.

Accessibility: Most people are not aware of the fact that a significant aspect of alternative investments is that they are not easily accessible to the large public. There are often restrictions on eligibility for alternative investments. This is partly due to the complexity of these investments and the widely unregulated market for these assets.

Also, most alternative investments require significantly higher financial commitments, usually in the minimums of $25,000 to $100,000. This automatically limits access to only investors who possess such amounts of money to invest.

Illiquidity: When investors want to buy conventional assets such as stocks or bonds, they can easily purchase them from the public financial markets through brokers or other investment platforms. This is not the case for alternative investments. Investing in alternative assets generally involve private dealings and contracts. Most alternative investments are not publicly listed, making them highly illiquid investments. When purchased, these assets may not be easily sold or disposed of as quickly as conventional assets.

High Risk: Alternative investments are relatively riskier forms of investments. This is due to many reasons. One of such reasons is as a result of the unregulated nature of alternative investments. The SEC does not regulate most alternative investments and as such, this can lead to inadequate disclosure practises and asymmetric Information about many aspects of these investments.

Also, although there may be less frequent swings in alternative markets, occasional swings may be larger. Returns on alternative assets may be relatively higher, but also, any losses may have significantly more financial impact.

Stax Capital offers different real estate alternative investment options. Contact the team to discuss which available investment options are best suitable for your needs.

This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments. Also note that in assessing investment returns, past performances are not indicative of future performance.

There is no doubt that investing in real estate can be complex, but there are many misconceptions about real estate investments. Whether you are a new or potential real estate investor, or you have been in the game for quite a while, you probably have heard or come across certain misconceptions about investing in the real estate market.

Some of these misconceptions have been on for so long and unfortunately, many people believe them without carrying out adequate research to get the right information about property and real estate investments.

This article would review some of the misconceptions about investing in real estate and provide some information on what you need to know.

Misconception No. 1: Investing in real estate is too expensive

Firstly, expensive is relative and while there are real estate investments that require significantly huge sums of cash, there are also affordable means through which investors can partake of the potential benefits of real estate investments for a fraction of the cost. Secondly, the costs involved in real estate investments depend largely on the investment strategy and platform you use.

Also, there may be sources of funding such as bank loans through which individuals can get cash to invest in real estate. A simple example is, as a real estate investor who wants to purchase property directly in the market, you can do so by obtaining a loan from financial institutions.

Misconception No. 2: Investing in real estate provides passive income

Well, this may be true to an extent, depending on the type of investment. The reality is real estate investments are never really passive as there needs to be some sort of continuous management and maintenance of investment properties. A real estate investment may be considered a source of passive income when the burden of managing the properties or any tenant relationship is passed across to a third party.

For example, when you invest in alternative real estate investments such as Delaware Statutory Trusts (DSTs) or Real Estate Investment Trusts (REITs), although you may be at the passive end of things, managers of these investment vehicles are very active in the backend to ensure quality property investments are made and maintained.

Misconception No. 3: Investing in real estate is too risky and can be a bad decision

A basic concept behind any form of investing, whether in conventional financial instruments such as stocks or bonds, or alternative assets, is the possibility of returns. However, investing to make returns is also accompanied with underlying risks. Some of these risks include market risks — losing asset value due to fluctuations in market prices, economic risks — such as the real value of returns being eroded due to inflation.

The real estate market is not excluded from these possible risks. Property assets are relatively illiquid, meaning they may be more difficult to sell off to another party as quickly as you may want.

Most real estate investments are considered alternative forms of investments, they are generally not regulated and therefore considered to be risky. However, as it is with other types of investments, you need to be well informed about the different options of investing in real estate. Make sure to engage subject matters and experts such as accountants and financial advisors before taking any calculated risks with real estate investments.

Misconception No. 4: When it comes to investing in real estate, the cheaper the better

With real estate investments, cheaper doesn't always mean better. While getting good deals is something to look forward to, cheaper properties may lead to even more expenses in the long run. One of the possible ways to make returns from real estate investments is through the sale of property at an appreciated value leading to capital gains. Cheaper properties in certain locations may not appreciate, especially at the pace that you would expect and prefer.

Likewise, when investing in real estate, a more expensive property does not automatically lead to higher gains and profit. A more affluent region may appreciate even slower than a suburban property location in the long run. Investing in real estate is not always black and white. Asides purchase price and location, a lot of other factors impact the overall performance of real estate investments.

Misconception No. 5: Real estate investments can only be held for long-term periods

Most real estate investments are illiquid, but you can also hold some real estate investments for short-term periods. One of the things you need to consider before you choose a specific real estate investment method is your investment objective. Some investors are in it for long term periods of up to ten years. Others may want to hold their investments for only about three to five years. Determining what your investment expectations and objectives are ahead of time would help you choose the best strategies.

Misconception No. 6: Investing in real estate always leads to easy profit

Are there possibilities of making returns in real estate investments? Yes. However, there is no guarantee. For real estate investments that perform relatively well, a lot of work goes into research, due diligence, property selection and management.

When real estate investments involve pooling resources to partake in institutional quality properties for fraction of the costs, the sponsors and managers of such investment vehicles engage a lot of expertise and professionalism to ensure that they employ top-notch management practises to make good property selections as well as tenant selections.

Investing in real estate can lead to potential profit but it requires a lot of work and effort. This is why investment partners charge investment fees, to support the ongoing background work that has been passed on to them. Also, an important aspect to note is that past performances of investment vehicles do not guarantee future performances.

Misconception No. 7: The only benefit of investing in real estate is to earn dividends or capital gains made on sale

Capital gains and dividends as well as rental income are ways in which you can make returns from investing in real estate. However, there are other benefits that you can access through certain real estate investments. For example, through investing in Delaware Statutory Trusts as replacement property, you can qualify for the 1031 exchange tax deferral benefits, provided all requirements are met.

As a real estate investor, when you invest in Qualified Opportunity Zone Funds, you may be eligible for a capital gain deferral, a capital gain reduction or even an entire capital gain elimination when eligible investments in a Qualified Opportunity Fund are held for at least 10 years.

There is also the benefit of diversifying your portfolio through investing in real estate. Generally, real estate investments are not directly impacted by the market swings in stock markets and bond markets. This may provide a good means for investment diversification to serve as a cushion for potential losses in other investment assets. However, it is important to note that while investment diversification may reduce the impact of potential losses in some assets, even the best diversification strategy does not guarantee a hundred percent protection against total investment losses.

How to approach misconceptions about investing in real estate

Perform your own research:

Carry out extensive research to ensure that you have the adequate information you need about the different types and kinds of real estate investments. When you are more informed, you are likely to make better investment decisions. Research can be in the form of using the internet to get reviews and ratings, you can also obtain information about investing in real estate from potential investment partners. Information about publicly listed real estate assets can also be very useful.

Investing in real estate requires huge capital and financial commitment, as such, it is recommended to make research an important part of the process. Plan properly and ensure you get objective insights.

Engage subject matter experts:

Investing in real estate can be complex. There are usually many aspects to the whole investing process. For example, real estate investments require that you sign off on contracts, a lawyer may need to be engaged to the review terms and conditions of any purchase or investment agreements. Also, there may be some tax implications involved in purchasing or selling a real estate property. In this case, an accountant would be in the best position to provide expert advice on how this would impact current and future tax situations. Tax experts can also help you analyze your investment transactions to identify areas for potential tax benefits and advantages.

Partner with good investment partners:

To a very large extent, the investment partners you engage would determine your experience in the entire process when investing in real estate. While the investment partners cannot guarantee the returns you would get from your investments, their expertise and professionalism can impact the investment process. Real estate investment partners with more experience and professional knowledge can provide better insight, carry out better due diligence and invest in higher quality real estate properties on your behalf.

Stax Capital is a trusted investment partner. We are an experienced team that engages professional due diligence and expertise in making sure your investment goals are achieved. Contact the team for any questions on investments through real estate vehicles such as Delaware Statutory Trusts, Qualified Opportunity Funds and Direct Participation Programs.

This article does not constitute any tax advice. Individuals are encouraged to seek professional advice from independent tax advisors regarding tax consequences of investments.

Capital gains in the United States are subject to tax when realized. As a real estate investor, this includes capital gains realized on property sold or exchanged. If you have sold or exchanged property resulting in any capital gains, you would be expected to report such gains in your tax return. However, you may be able to elect for a capital gains tax deferral if you opt to reinvest in like kind property or designated opportunity zone communities. 

Two popular property investment vehicles that encourage long-term real estate capital investments are the 1031 Exchange and the Qualified Opportunity Fund (QOF). They spur up investments by providing capital gains tax incentives on the sale or exchange of property investments. The underlying concept behind 1031 exchanges and QOFs is the opportunity to defer taxes when capital gains from property sale are reinvested in property using either of these vehicles.

Qualified Opportunity Funds and 1031 exchanges operate with different requirements. While they arguably serve diverse purposes, the tax advantage associated with these two investments vehicles spur up real estate investments. Here's what investments in QOFs and 1031 exchanges entail.

1031 Exchanges

The 1031 exchange gets its name from the Internal Revenue Code (Section 1031) which introduced a tax incentive for property capital gains when reinvested in a like kind property. This type of investment is sometimes referred to as a 1031 like kind exchange. When considering real estate investments through 1031 exchanges, it is important to be aware of the underlying rules that make your transaction qualify for capital gains tax deferral. Any mistakes may disqualify your property exchange transaction from being considered as a 1031 like kind exchange. 

When you make a property sale, you’ll need to identify the reinvestment property within 45 days from the sale or exchange of your relinquished property. The new property or properties would need to be of like kind nature with the relinquished property. You will also be expected to make this reinvestment within 180 days from the sale of your relinquished property. 

An important part of the 1031 exchange is using an intermediary to facilitate the exchange of properties as this cannot be done directly.

An important factor in a like kind exchange is the value of properties being exchanged. If the sale proceeds of the disposed property exceed the fair market value of the new property or if there is any exchange that is not considered like kind in nature, this can result in capital gains being realized. These capital gains would be subject to tax.

Qualified Opportunity Fund 

The tax incentive through investments in a Qualified Opportunity Zone was introduced by the Tax Cuts and Job Act (TCJA) in 2017. Real estate investors can contribute to economic development by investing in Qualified Opportunity Zones (QOZs). In return, investors get tax advantages on eligible capital gains invested in these distressed communities.

When you invest capital gains in a Qualified Opportunity Fund, you may be eligible for tax deferral subject to all requirements being met. One key requirement is that the investment of capital gains must be made within 45 days from the date which the property is disposed and gains are realized. Also, it is important to note that the ownership interest in QOFs should be equity and not debt. For qualified investments in a QOF, capital gains tax can be deferred until the earliest of when sold or by December 31, 2026. 

Asides a capital gains deferral, you may be able to reduce taxes on capital gains by 10% if you hold an investment in a QOF for at least 5 years. If your holding in a QOF is held longer for at least 7 years, your capital gains tax may be reduced by 15%.

The great part about property investments in a QOF is that investors may be eligible for a total tax elimination on capital gains realized from the disposal of your qualified investment in a QOF.

Opportunity Funds or 1031 Exchanges? Factors to Consider

While the best capital gain reinvestment decision would depend on specific situations and the best optimal wealth management strategies, here’s what to consider when exploring capital  gains reinvestments in either a 1031 like kind exchange or a Qualified Opportunity Fund.


The flexibility of investing in either a Qualified Opportunity Fund or a 1031 exchange varies and may suit different investment goals. Investments in  Qualified Opportunity Funds have to be in communities designated as QOZs while for 1031 exchanges, properties exchanged need to be of like kind in class and nature.  As an investor, whatever option you decide to invest through would be limited based on these restrictions.

Also, Investments in QOFs are more flexible and can be done directly without the need for an intermediary. 1031 exchange investments on the other hand require the use of an intermediary. A property reinvestment  is only deemed a qualified transaction for a 1031 exchange when property exchanged is carried out through a third party called a facilitator or an intermediary. The facilitator is responsible for collecting and transferring the sale proceeds as well as the reinvestment property.

Tax deferral:

While capital gains investments in 1031 exchanges and Qualified Opportunity Funds provide incentives for tax deferral, tax deferrals for QOFs are time sensitive. Tax deferrals from reinvestments in QOFs are on the earlier of a sale or exchange of a qualified investment or December 31, 2026. There are therefore uncertainties around this benefit for investors who need to hold their investments for longer.

In comparison, an eligible tax deferral on 1031 exchange investments comes into effect at any time of disposal of the reinvested property.

Tax elimination:

There is the possibility of tax elimination with investments in Qualified Opportunity Funds. This elimination may only be applicable after 10 years of holding qualified investments in a QOF and it is applied on the capital gains from sale of the interest in a QOF. An investment in property through a 1031 like kind exchange would usually not allow for tax elimination of gains after property sale or exchange.


One of the key rules for a capital gain reinvestment  in property to qualify as a 1031 like kind exchange is that the new property has to be identified within 45 days after the sale or exchange of the disposed property. In addition to this rule, the sale or exchange of properties needs to be done within 180 days from the sale or exchange of the disposed property.

The requirements for investments in Qualified Opportunity Funds  does not include a property identification timeline , however, the Internal Revenue Service (IRS) requires that reinvestment of capital gains are done within 180 days from when they are realized.

Reinvestment value:

The basic rule for capital gains reinvestments to qualify as a 1031 exchange is the reinvestment in like kind property. Any reinvestments in property that does not qualify as like kind or property with market value below the relinquished property may result in gains that are subject to tax. In this case, the entire principal and capital gains from a property sale may need to be fully reinvested to benefit the full tax deferral advantage.

For Qualified Opportunity Funds, there is no requirement to reinvest the principal from property sale. You can benefit from the tax deferral incentive that comes with investing in a Qualified Opportunity Zone by only reinvesting the capital gain from your disposed investment.

Capital gains:

Capital gains deferral through a DST are realized through property sale or exchange, while capital gains deferred through a QOF can be gotten through other forms of investment like stocks or bonds. This provides more opportunities for investors looking to manage their capital gains tax from a broader range of investment portfolios.

Final Thoughts

Qualified Opportunity Funds and 1031 exchanges provide means for managing capital gains tax. Both vehicles have tax advantages when certain rules and requirements are met. A 1031 like kind exchange may qualify for tax deferral and a holding in a QOF can lead to capital gains tax deferral, reduction or even elimination. 

The decision to use either a 1031 exchange or a QOF is dependent on specific investment goals as well as preference. You can choose one vehicle over the other based on the flexibility of your investment transactions or the location of investment property that suits your preference.

Also this decision may be made based on the need to take advantage of possible tax reduction or elimination on property capital gains. Both investment vehicles are available to accredited investors who are deemed financially sophisticated to invest in non-publicly traded investments. The nature of investments in QOFs and 1031 exchanges make them complicated alternative investments and thus require assessment and advise from tax experts or investment advisors .

Finding the best investment partner as a real estate investor is very important. The best investment partner is one that works with you to understand the different investment options you have and provide effective investment strategies to help you reach your goals. Stax Capital provides years of experience and professionalism in alternative real estate investments. You can explore property investments through a 1031 exchange with Stax Capital. The Delaware Statutory Trusts vehicle offered by Stax Capital qualifies as 1031 like kind exchange through which you can reinvest your capital gains from property sale. We also offer real estate opportunities through Qualified Opportunity Funds that may be eligible for capital gains deferral, provided all requirements are met. 


An alternative option that can be explored by real estate investors looking to diversify their portfolio and take advantage of possible tax benefits is the Qualified Opportunity Zone investment opportunity. Here are some of the important things to know about investing in Qualified Opportunity Zones through Qualified Opportunity Funds.

What is a Qualified Opportunity Zone?

The 2017 Tax Cuts and Jobs Act (TCJA) brought about the Qualified Opportunity Zone (QOZ) investment opportunity to encourage capital investments in economically distressed communities. These communities are usually nominated by a state, the District of Columbia, or a U.S. territory.

Qualified Opportunity Zones can be found in all 50 states, the District of Columbia, and 5 United States territories. The Internal Revenue Service (IRS) provides a list of the locations classified as QOZs.

The capital investments in these zones are expected to boost economic development and spur up economic activities. As an investor, you are not required to live in these specified zones, you only need to invest eligible gains in the QOZs and elect for tax deferral benefits.

What are Qualified Opportunity Funds?

Qualified Opportunity Funds (QOFs)are investment vehicles set up solely for investing in Qualified Opportunity Zones. Investments in Qualified Opportunity Zones through Qualified opportunity Funds may be eligible for tax benefits. If you invest eligible gains in Qualified Opportunity Zones, you may be able to defer taxes on these gains.

You can make cash and non-cash investments such as property in a QOF, however, only qualifying investments may be eligible for tax deferral. In the case of property investment, the tax deferral would be limited to the basis of the property.

Qualified Opportunity Funds can be eligible partnerships or corporations or Limited Liability Companies (LLCs) set up to operate as partnerships or corporations with respect to federal income tax as long as they are set up for substantial investment in QOZ properties. To qualify as a QOF, 90% of the eligible entities’ assets should be in Qualified Opportunity Zone property.

What are the eligible QOZ properties?

An eligible QOZ property can be either of the following:

A qualified ownership interest held by Qualified Opportunity Funds in a partnership or corporation operating as a QOZ business (a Qualified Opportunity Zone stock) or,

Eligible Qualified Opportunity Funds’ tangible property utilized for business in a QOZ.

The properties for Qualified Opportunity Funds or qualifying ownership interest in a QOZ corporation or partnership have to be purchased after December 31, 2017. Also, the qualifying ownership interest has to be acquired with cash exchange.

In order to qualify as a tangible Qualified Opportunity Zone business property, the property has to either be used by the Qualified Opportunity Fund or QOZ business for trade or business purposes. Additionally, the property’s original use should have started with the Qualified Opportunity Zone business or QOF or it was substantially improved and used substantially for the Qualified Opportunity Fund or QOZ business purposes.

Certain entertainment properties and businesses located in QOZ such as clubs, liquor stores gambling facilities etc. may not qualify for Qualified Opportunity Funds’ investments.

What is the Qualified Opportunity Fund Tax Benefit?

The benefit received on a QOF qualified investment depends on the time period with which it is held. The increase in the Qualified Opportunity Fund basis gets higher the longer you keep your investment.

For example, the basis for a QOF investment held for at least five years increases by ten percent of the deferred gain, the basis increases even further by an additional five percent if held longer, for at least seven years.

If you decide to dispose of your interest in a QOF after 10 Years and you opt to increase its basis to the fair market value on the date of disposal, you may be eligible for permanent gain exclusion on the sale or exchange.

Rules for QOF Tax Deferral Benefit

Eligible gains which include capital gains need to be invested within a given time period for gains to qualify for tax deferral. Also, these gains need to be invested for equity interest Qualified Opportunity Funds. Eligible gains from property sale qualify for deferral, given that they are invested in a QOF within the 180-day period from when the gain was made.

To elect to defer your capital gain, you do this through your federal income tax return. Eligible tax deferral of qualifying QOF investments is valid until the earliest of an inclusion event or until December 31, 2026.

An inclusion event for your qualifying investment in a QOF refers to situations when you terminate or reduce your investment by selling it or gifting it or through a liquidation of the Qualified Opportunity Fund.

When you decide to reduce or terminate your investment in Qualified Opportunity Funds, you would need to report the deferred gain on your tax return. This deferred gain at the time of inclusion would be determined by taking the lesser of your deferred gain or the QOF Investment’s fair market value and subtracting the basis in the Qualified Opportunity Fund Investment.

You also need to report any gain or loss on the disposal of your QOF investment. The gain or loss can be determined through the basis in the Qualified Opportunity Fund investment.

Pros of Qualified Opportunity Funds

The benefits of investing in Qualified Opportunity Funds include:

Impact Investment Opportunity: Investing in Qualified Opportunity Funds may be attractive to investors passionate about making social and economic impact in their environment as QOFs target economic development in distressed communities.

Flexibility on eligible gains: The gains to be invested in a QOF for tax benefits are not restricted to capital gains from property sale. Eligible gains could also include gains from investments such as stocks or bonds.

Investment portfolio diversification: Accredited investors looking to diversify their portfolio can utilize the QOF vehicle.

Capital gain deferral: Eligible capital gains such as gains from property sale can be deferred if reinvested in a Qualified Opportunity Fund.

Capital gain reduction: The step-up basis for investment in Qualified Opportunity Fund allows you to reduce capital gain recognized on your interest in the QOF when sold or exchanged after at least five years of holding it.

Capital gain elimination: Capital gains of qualified investments in a Qualified Opportunity Fund may be eligible for total tax elimination when held for at least 10 years.

Cons of Qualified Opportunity Funds

Illiquid investment: Property investments through Qualified Opportunity Funds are relatively illiquid as there are no public markets for these alternative investment types. Interests in QOF may take significant time to sell than traditional investment types such as shares and bonds.

Time bound benefits: To access the majority of the tax benefits from investing in Qualified Opportunity Funds, you need to meet the time limits required. This kind of investment may be suitable for only long-term investors.

Also, the December 31, 2026 timeline for tax benefits means to be eligible for the seven-year 15% basis increase, an investment in a QOF must have been made by December 31, 2019.

 Gains not guaranteed: As with other types of investments, there is no guarantee for gains on properties invested through a QOF either through returns or capital appreciation.

Legal risks: There could be changes to laws and requirements for tax benefits as regards investments in Qualified Opportunity Funds. There is therefore no certainty on any changes or extension of these benefits’ deadline dates or requirements.

Non-qualifying investment: Making transfers or gifting your qualified investments in a QOF signifies an inclusion event and makes the investment non-qualified in the hands of the new owner. You would have to recognize any gains for tax purposes when this occurs.

How to Invest in Qualified Opportunity Funds

As a taxpayer, you would need to meet the 180-days rule by investing any capital gains within 180 days when your investment was sold, and gains realized. To ensure that you meet this requirement, it is recommended to locate a QOF opportunity beforehand and make all the necessary research and inquiries.

Investing in Qualified Opportunity Funds usually involves complex processes and requires significant investment knowledge, hence you may need the professional services of a chartered professional accountant or a tax expert. This helps you understand the underlying benefits as well as the risks involved.

You could set up your own QOF or invest through established Qualified Opportunity Funds. Established Qualified Opportunity Funds provided by investment firms would generally have an investment agreement specifying liabilities, rights and obligations, also they usually have requirements on minimum investment amounts and sizes. Also, these investment opportunities may only be available to accredited investors.

The QOF you choose to invest in would manage your investments and provide any periodic returns based on the portion of your investment and any other specifications outlined in your investment agreement.

Conclusion on QOFs

Qualified Opportunity Funds provide an alternative means of investing and diversifying through real estate property in Qualified Opportunity Zones. Qualifying investments in QOZ attract tax benefits, you can take advantage of these benefits if the necessary requirements are met.

Stax Capital specializes in providing access to Qualified Opportunity Funds. Our experience coupled with our effective investment strategies can help you access potential benefits through QOF investments. Find out more about our offerings on Qualified Opportunity Funds.


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