Election Could Reshape Opportunity Zones and 1031 Exchanges

A yellow traffic sign has three arrows pointing in different directions and says "Decisions ahead." — (Image credit: Getty Images)

As we approach another pivotal election, investors and real estate professionals are keenly focused on how the outcome might affect key tax deferral strategies, particularly qualified opportunity zones (QOZs) and 1031 exchanges. My crystal ball is a bit foggy, mind you, and either presidential candidate might have their ambitions curtailed by a Senate or House that may or may not offer much support for their agenda.

Nevertheless, let’s examine how a Harris or Trump presidency could shape these important investment vehicles based on their past actions, statements and policy positions and with the assumption that their future plans will be in line with their past positions.

Trump on qualified opportunity zones

This one is pretty easy to figure out, as the qualified opportunity zone program was created under the Trump administration as part of the 2017 Tax Cuts and Jobs Act (TCJA). Former President Trump has consistently touted the program as a success story of his presidency. In a 2020 speech at the World Economic Forum, Trump proclaimed, “We created nearly 9,000 opportunity zones in distressed communities where capital gains on long-term investments are now taxed at zero, and tremendous wealth is pouring into areas that for a hundred years saw nothing.”

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If re-elected, Trump would likely:

Maintain or expand the current qualified opportunity zones program
Potentially extend the tax benefits beyond their current expiration dates
Resist calls for increased oversight or restrictions on the program

However, it's important to note that even under Trump, there were some bipartisan efforts to reform aspects of the QOZ program. In 2019, Senators Tim Scott (R-SC) and Cory Booker (D-NJ) introduced legislation to increase reporting requirements for opportunity funds. A second Trump administration might be open to some modest reforms while keeping the core program intact.

Trump on 1031 exchanges

As a former real estate developer, Trump has long been familiar with 1031 exchanges and has historically been supportive of the provision. During his first term, his administration successfully defended 1031 exchanges from elimination during tax reform negotiations.

Political observers may also recall Trump’s "I love depreciation" observation from his October 2016 debate with Hillary Clinton, referring to various real estate tax benefits, including 1031 exchanges.

If re-elected, Trump would likely:

Maintain the current 1031 exchange rules without significant changes
Potentially explore ways to expand the use of 1031 exchanges, such as allowing them for a broader range of asset classes (though it should be noted that the TCJA actually eliminated multiple assets from eligibility for 1031 exchanges in 2017)
Resist any efforts to limit or eliminate the provision

Harris on qualified opportunity zones

Vice President Harris has had a complex relationship with qualified opportunity zones. While she has supported the general concept of driving investment into underserved communities, she has also been critical of how the program has been implemented.

While she has backed off an original pledge to repeal the TCJA in its entirety, Sen. Harris did support the 2019 Opportunity Zone Reporting and Reform Act, which aimed to increase transparency and prevent abuse of the QOZ program. This legislation would have required more detailed reporting from QOZ funds and tightened restrictions on which areas could qualify as opportunity zones.

"We need to make sure these tax incentives are actually benefiting the communities they're supposed to help, not just wealthy investors," Harris stated when introducing the bill.

If elected president, Harris would likely push for reforms to the QOZ program rather than its outright elimination, especially given the program’s bipartisan appeal. Her focus might nevertheless include:

Enhanced reporting requirements for QOZ funds
Stricter criteria for designating opportunity zones
Measures to ensure more direct benefits to zone residents, such as job creation requirements
Possible limitations on real estate investments in favor of operating businesses

Harris on 1031 exchanges

Harris has been less vocal about 1031 exchanges specifically, but her broader tax policy positions provide clues to her potential approach. As part of President Biden's campaign, she supported plans to eliminate 1031 exchanges for investors with annual incomes over $400,000.

While not mentioning 1031 exchanges directly, she has indicated an interest in closing tax loopholes that she and other Democrats say primarily benefit the rich and large corporations. This sentiment aligns with the Biden administration's proposal to limit their use.

As president, Harris might pursue:

Income caps on 1031 exchange eligibility
Restrictions on the types of properties eligible for exchanges
Limitations on the amount of capital gains that can be deferred

It's worth noting the complete elimination of 1031 exchanges is highly unlikely, given their long history and broad support in the real estate industry. However, significant modifications could be on the table, depending, as always, on congressional support.

Comparing approaches

The contrast between Harris and Trump on these issues is stark, reflecting their differing economic philosophies and constituent bases.

Harris, in line with broader Democratic Party policies, would likely seek to tighten regulations and close what she sees as tax loopholes benefiting primarily wealthy investors. Her approach to both QOZs and 1031 exchanges would probably involve more government oversight, stricter qualification criteria and potential limitations based on income or investment size.

Trump, on the other hand, would likely maintain or expand both programs, viewing them as successful tools for economic growth and job creation. His approach would probably involve less government intervention and broader eligibility, with a focus on attracting more capital to these investment vehicles.

Potential market impacts

The election outcome could have significant implications for real estate markets and investment strategies:

Under Harris, we might see a short-term surge in 1031 exchange activity as investors rush to complete deals before any new restrictions are implemented. Long term, there could be a cooling effect on certain segments of the commercial real estate market if 1031 benefits are curtailed.
With Trump, the real estate market might see continued or increased use of both QOZs and 1031 exchanges, potentially driving up property values in opportunity zones and maintaining the current velocity of tax-deferred property exchanges.
Harris' potential reforms to the QOZ program could lead to a shift in investment patterns, possibly favoring operating businesses over real estate projects in opportunity zones.
Trump's approach might encourage more long-term holds in opportunity zones as investors seek to maximize the program's capital gains exclusion benefit.

It’s important to bear in mind, though, that November’s election also places control of both the Senate and the House in play. With both houses of Congress featuring extremely narrow margins for the controlling party, and 33 Senate and all 435 House seats up for grabs in November, it's impossible to predict which party will be in control of either the executive or legislative branches. Nevertheless, neither presidential candidate will find their ideas gaining much traction if the opposition party controls one or both houses of Congress.

Conclusion

While both candidates profess a desire to spur economic growth and job creation, their approaches to QOZs and 1031 exchanges differ significantly. Harris leans toward reform and restriction, while Trump favors maintenance or expansion of these programs.

Investors and real estate professionals should closely monitor the election and its aftermath, as the outcome could necessitate significant strategy adjustments. Regardless of who wins, it's clear that both QOZs and 1031 exchanges will remain hot topics in the ongoing debate over tax policy and economic development.

As always, investors should consult with qualified tax and legal professionals when making decisions about these complex investment strategies. The political landscape can shift quickly, and it's a good idea to stay informed about potential policy changes that could impact your investment portfolio.

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Daniel Goodwin is a Kiplinger contributor on various financial planning topics and has also been featured in U.S. News and World Report, FOX 26 News, Business Management Daily and BankRate Inc. He is the author of the book "Live Smart - Retire Rich" and is the Masterclass Instructor of a 1031 DST Masterclass at www.Provident1031.com. Daniel regularly gives back to his community by serving as a mentor at the Sam Houston State University College of Business. He is the Chief Investment Strategist at Provident Wealth Advisors, a Registered Investment Advisory firm in The Woodlands, Texas. Daniel's professional licenses include Series 65, 6, 63 and 22. Daniel’s gift is making the complex simple and encouraging families to take actionable steps today to pursue their financial goals of tomorrow.