How to Combine a 1031 Exchange with an Opportunity Zone Investment
For investors looking to defer capital gains and reinvest strategically, both 1031 Exchanges and Opportunity Zone (OZ) investments offer powerful tax advantages. While each program operates under different IRS rules, it’s possible to combine the two strategies — giving investors flexibility in managing both timing and long-term tax exposure.
Here’s how it works and what you need to know.
Understanding the Basics
1031 Exchange:
Allows investors to defer capital gains taxes by selling an investment or business property and reinvesting the proceeds into another like-kind property within strict timeframes (45-day identification and 180-day completion).
Opportunity Zone Investment:
Allows investors to reinvest capital gains from any source (real estate, stocks, business sale, etc.) into a Qualified Opportunity Fund (QOF) that invests in designated low-income communities. Investors can defer the original gain until December 31, 2026, and exclude future appreciation from taxation if the investment is held for 10 years or more.
How Investors Combine the Two
It’s not possible to directly exchange into an Opportunity Zone Fund through a 1031 Exchange, because QOF interests are securities, not real estate — and therefore not “like-kind.”
However, investors can still use both strategies sequentially:
Sell a Property via 1031 Exchange:
Use the 1031 Exchange to defer taxes on the initial sale and acquire a new replacement property.
Later Sell the Replacement Property:
When you eventually sell that property, you’ll have a new capital gain.
Reinvest into an Opportunity Zone Fund:
You can then invest those gains into a QOF within 180 days to take advantage of Opportunity Zone tax incentives.
This two-step approach lets investors use 1031 rules for immediate deferral, then transition into an Opportunity Zone investment when they’re ready to simplify or diversify.
Key Differences to Keep in Mind
| Aspect | 1031 Exchange | Opportunity Zone Investment |
|---|---|---|
| Eligible Assets | Real property held for investment/business | Capital gains from any source |
| Reinvestment Type | Like-kind real estate | Equity in Qualified Opportunity Fund |
| Deferral Period | Indefinite (until non-qualifying sale) | Until Dec. 31, 2026 |
| Tax-Free Growth | No | Yes, after 10-year hold in QOF |
| Replacement Timing | 45/180 days | 180 days from sale or gain recognition |
Practical Example
An investor sells an apartment building and completes a 1031 Exchange into a retail property, deferring the gain.
After several years, the investor sells that retail property and decides to invest the new gain into a Qualified Opportunity Fund before the 180-day window closes.
The investor successfully defers capital gains twice — once through the 1031 Exchange, and again through the Opportunity Zone reinvestment — while gaining the potential for long-term tax-free growth.
Timing and Compliance Considerations
Funds used in a 1031 Exchange must go directly through a Qualified Intermediary — they cannot be diverted to an Opportunity Zone Fund mid-exchange.
The Opportunity Zone investment must occur after the 1031 Exchange property is sold and the gain is realized.
Consult with a tax advisor to ensure the timing of both transactions meets IRS rules and reporting requirements (including Form 8949 and Form 8997 for OZ investments).
The Strategic Advantage
Combining a 1031 Exchange and an Opportunity Zone investment can give investors the best of both worlds — long-term tax deferral through 1031, followed by tax-free appreciation through an Opportunity Zone.
This approach is especially useful for investors nearing retirement or looking to transition from active property management into a more passive structure, while still keeping tax efficiency at the forefront.
