OZ MAGAZINE 2022 Top 25 Influencers issue 2.2 | Page 20
20 OPPORTUNITY ZONE MAGAZINE | ISSUE 2 • VOLUME 2
USING SECTION 1031 EXCHANGES INSIDE OPPORTUNITY ZONE
By Matthew E . Rappaport
How to secure OZ capital and what strategies to use when taking advantage of the OZ incentive and a 1031 Exchange at the same time .
Now that we are four years into the Opportunity Zone program , QOF and QOZB investments are starting to experience the same twists and turns as vanilla deals , including early exits . In the real estate context , OZ players are faced with the options when they are considering a very generous and unexpected offer to purchase their OZ project despite falling well short of the 10-year holding period required to get the OZ program ' s signature tax benefit . This presents the sponsor with a serious dilemma : they might want to accept the prospective buyer ' s overwhelming offer , but they don ' t want to let their investors down by sacrificing the plum tax advantage an OZ investment can secure after a 10-year hold .
If the sponsor is comfortable investing in a new OZ project , the solution to the sponsor ' s issue might be a Section 1031 exchange , a tax deferral technique popular since at least the Ninth Circuit ' s Starker decision in 1979 . That ruling allowed taxpayers to enact delayed exchanges instead of simultaneous ones , giving taxpayers more flexibility to accept cash proceeds from real estate sales and use the funds to purchase replacement property without paying income taxes immediately . A subsequent revenue procedure set forth a safe harbor for parking exchanges , which allowed taxpayers the freedom to purchase replacement property first and sell relinquished property later ( thereby completing the 1031 process in " reverse ").