Opportunity Zones vs. 1031 Exchanges: Which Strategy Wins in 2025?

Opportunity Zones vs. 1031 Exchanges: Which Strategy Wins in 2025?

If you're sitting on a sizable capital gain from a business sale, stock liquidation, or a successful real estate flip, you’ve probably been told to do a 1031 exchange.

But here’s what most investors don’t know: Opportunity Zones (OZs) are back in play—and after the OBBBA passed, they’re not just back… they might actually be better.

Let’s break down the differences, and more importantly, when one strategy makes more sense than the other.

1031 Exchange: A Classic Tool with Strict Rules

1031 exchanges let you defer capital gains when you sell real estate and reinvest the full proceeds into another “like-kind” property.

Key points:

• Must reinvest 100% of proceeds, not just gains

• Must follow a strict timeline (45-day identification, 180-day close)

• Applies to real estate only

• Tax is deferred—not eliminated

• Basis carries forward (no reset unless you die with the asset)

It’s a strong tool for active real estate investors, especially those with long-term portfolios and trusted intermediaries.

Opportunity Zones: A Flexible, Long-Term Strategy

Opportunity Zones (OZs) were made permanent under the OBBBA and got even better:

• You only need to invest the capital gain portion—not the full proceeds

• Applies to a wider set of assets (real estate, stocks, businesses)

• Defers tax on that gain for 5 years

• Offers a 10% basis increase, or 30% if invested in a rural zone

• If you hold the investment for 10 years, the new gain is tax-free

The benefit here isn’t just deferral—it’s elimination. That’s a huge distinction.

Real-World Example

Let’s say you sell a business and recognize $5M in capital gains.

1031 route: You can’t use it. Doesn’t apply.
OZ route: You can roll the $5M gain into an OZ fund, defer taxes for 5 years, reduce your taxable gain, and eliminate future gains on the OZ asset entirely after 10 years.

Or let’s say you sell a rental for $2M with $800K in capital gains.

1031 route: You need to reinvest the full $2M in a new real estate deal.
OZ route: You only need to invest the $800K gain. More capital flexibility, more liquidity, and long-term tax-free upside.

When 1031 Still Wins

Don’t get me wrong—1031s are still powerful. They’re often better if:

• You want to stay in real estate

• You need full control of the asset

• You want to preserve depreciation

• You plan to hold the new property until death (basis step-up)

For seasoned operators, 1031 is a key part of the “defer ‘til you die” strategy.

When OZ Funds Make More Sense

Opportunity Zones work best when:

• You’ve sold a non-real estate asset (stock, business, crypto)

• You want to eliminate tax, not just defer it

• You don’t want the full reinvestment constraints of 1031

• You’re open to a 10+ year hold for long-term upside

We’ve helped clients do both. But in 2025, OZs have the momentum—and for many investors, more upside.

Final Thought

1031s are great. But they’re rigid.
OZs are more flexible, potentially more rewarding, and now—thanks to OBBBA—here to stay.

The smartest investors don’t just pick a strategy. They build the right one for the type of gain, the timeline, and the outcome they want.

Let’s run the numbers on your next exit and map the best path forward.