How the comparison works
All three paths start from the same net sale proceeds and earn the same pre-tax return. The difference is how much stays invested and what is taxed at the end.
| Path | What is invested | Tax on the original gain | Tax on growth |
|---|---|---|---|
| Pay the tax | Proceeds less tax | Paid now | Taxed on sale |
| 1031 or DST | All proceeds | Deferred until a taxable sale | Taxed on sale |
| OZ 2.0 fund | The gain (basis invested separately) | Due at year 5, after a 10% or rural 30% step-up | Excluded after 10 years, measured no later than year 30 |
Worked example
Suppose a hypothetical seller nets $2,000,000 on a property with a $1,000,000 basis, uses a 23.8% rate throughout, and earns 6% a year for 10 years. These are the calculator's defaults.
- Pay the tax: $238,000 today, leaving $1,762,000 to invest, and $2,823,827 after tax at the end.
- 1031 or DST: all $2,000,000 grows to $3,581,695; tax on a sale at the end is $614,444, leaving $2,967,252.
- OZ 2.0 fund: $1,521,442 on the gain portion plus $1,602,626 on the $1,000,000 basis portion, for $3,124,068.
Shorten the holding period to 4 years and the order changes: with no step-up and no exclusion yet, the exchange ends ahead. Keeping an exchange until death changes it again, because basis generally resets to value at death under IRC 1014.
Rules the numbers do not show
- An exchange covers only real property held for business or investment, with 45 days to identify replacement property and 180 days to close (IRC 1031).
- A fund can take any eligible capital gain, including gain from stock, within the 180-day window. Ordinary income, such as section 1245 recapture, is not eligible. See eligible gains.
- Exchanges can be repeated. A fund's deferral ends at five years at the latest.
- To defer all gain in an exchange, the replacement generally must carry equal or greater value and debt, or cash must fill the gap.
Common questions
Why does the fund path invest only the gain?
Section 1400Z-2 defers gain invested in a Qualified Opportunity Fund, so only the gain needs to go in. The return of basis is ordinary cash. The calculator invests that cash in a taxable alternative at the same return so all three paths start with the same dollars.
Where does a DST fit?
A Delaware statutory trust interest can be replacement property in a 1031 exchange under Rev. Rul. 2004-86, so for tax purposes it follows the exchange path. The calculator does not model DST fees or sponsor load, which you should compare separately.
Can I do a 1031 exchange into an Opportunity Fund?
No. An exchange needs like-kind real property as replacement, and a fund interest is not real property. A seller can skip the exchange and invest the gain in a fund within the 180-day window.
Which path is best?
The calculator shows the arithmetic for the inputs you enter and nothing more. Holding period, debt on the property, recapture, state tax and the quality of the investment can each change the answer, so review it with a tax adviser.