Opportunity Zones for real estate investors selling property

Yes. Gain from selling real property held for investment or used in a business qualifies to the extent it is capital gain or §1231 gain, and you invest it in a Qualified Opportunity Fund (QOF) within 180 days¹. Under the final regulations, the gross §1231 gain from each sale qualifies, without netting against §1231 losses, and the 180-day period begins on the date of the sale^2,3.

You only need to invest the gain. Your adjusted basis comes back free of tax, and you can use it to pay off the mortgage or for any other purpose. Selling to a related person (20% or more common ownership) makes the gain ineligible¹. For the full treatment, see section 1231 gains and Opportunity Zones.

Not when it is ordinary income. The final regulations exclude gain treated as ordinary income under §1245 or §1250 recapture from eligible gain⁴. For a building, recapture under §1245 typically arises on components a cost segregation study reclassified as shorter-lived personal property, which is taxed as ordinary income to the extent of depreciation taken⁵. Bonus depreciation on those components, now 100% for property acquired after January 19, 2025, increases the recapture on a later sale⁸.

Straight-line depreciation on the building itself produces unrecaptured §1250 gain, which is long-term capital gain taxed at a maximum 25% rate⁶. The regulations exclude only recapture treated as ordinary income, so unrecaptured §1250 gain, which is part of the §1231 gain and capital in character, is generally read to be eligible; confirm this for your facts with your tax adviser.

Using the example above and federal rates only, investing the $2,600,000 eligible gain on or after January 1, 2027 defers its tax for five years from the investment date¹⁵, then taxes 90% of it in a standard fund or 70% in a Qualified Rural Opportunity Fund^9,14.

The step-up is applied proportionally here for simplicity; how the inclusion is characterized across rate classes should be confirmed with your adviser. The $400,000 of recapture is taxed at ordinary rates in the year of sale in every case. Growth on the fund interest after 10 years can be excluded, which is where most of the value sits. See the tax savings example.

A 1031 exchange suits sellers who want to keep owning real estate directly and defer indefinitely; a QOF suits sellers who want to take out their basis, diversify into a fund, and get tax-free growth after 10 years. Under §1031, real property held for business or investment can be exchanged for like-kind real property without recognizing gain, but cash or other property received is taxable⁷. The replacement must be identified within 45 days and acquired within 180 days⁷.

Full comparison: Opportunity Zone vs. 1031 exchange.

The partnership can elect to defer at the entity level, or each partner can elect with a 180-day period starting at the partnership's year-end, the date of the sale, or the unextended due date of the partnership's return³. That flexibility helps partners who learn of the gain from a K-1. Partnerships that do a 1031 exchange while some partners want cash sometimes use a partial exchange, with the recognized gain allocated to those partners eligible for QOF investment. Have your adviser review any such allocation. See partnership and K-1 gains.

Seller-financed sales follow the installment method: gain is reported as payments arrive, each payment can start its own 180-day window (or, by election, one window from the last day of the tax year), and recapture is reported in the year of sale¹³.

Most mistakes come from treating a QOF like a 1031 exchange, or from not knowing how much of the gain is recapture until the return is prepared.

• Assuming all gain is eligible: cost-segregated properties can carry large ordinary recapture that must be taxed in the year of sale.
• Missing the window: the 180 days run from the closing date, not from year-end, for gain recognized directly.
• Using a qualified intermediary for a QOF: cash should come to you and then go to the fund as an equity investment; a 1031 intermediary arrangement is a different structure.
• Selling to a related buyer: 20% or more common ownership makes the gain ineligible.
• Forgetting year five: tax on 90% (or 70%) of the deferred gain is due in the year that includes the fifth anniversary, whether or not you can sell the fund interest.
• Ignoring state law: some states, including California, do not follow the federal deferral.

See inclusion events for the transactions that can trigger the deferred gain early, and depreciation and Opportunity Zones for how depreciation inside the fund is treated.

1. 1.Before listing, get a gain estimate split into recapture, unrecaptured §1250 gain and other §1231 gain.
2. 2.Decide between a 1031, a QOF, or both, based on how much cash you want and how long you will hold.
3. 3.If using a QOF, pick a fund and finish diligence before closing.
4. 4.Invest the eligible gain within 180 days of the sale date.
5. 5.Elect deferral on Form 8949 and file Form 8997 every year¹².
6. 6.Reserve cash for the year-five tax and check state rules.

For real estate sellers who want to stay in real assets without managing them, data center funds offer long-lived property with long-term tenants; OZ Data Centers sponsors funds of this kind. Read data centers in Opportunity Zones and the fund due diligence checklist before committing. On exit, investors in flow-through QOFs held 10 years can also elect to exclude gain from the fund's asset sales, including recapture at the fund level¹⁶. The permanent program's core terms are summarized by Novogradac¹⁰ and RSM⁹; California does not conform¹¹.