Updated August 16, 2026
You can, and the two work very differently in ways that matter for an apartment building seller. A 1031 exchange defers the entire gain but requires you to reinvest the full sale proceeds into like-kind real estate on a strict timetable. A qualified opportunity fund investment defers only the capital gain — you keep the return of basis — has no like-kind requirement, and gives you 180 days rather than the 1031's 45-day identification deadline. The tradeoff is that the OZ deferral ends on a fixed date rather than continuing indefinitely, and the real benefit requires a ten-year hold in the fund. The rules also changed substantially under the 2025 tax act, and 2026 sits directly on the seam between the old program and the new one.
What you must reinvest. A 1031 requires the full net sale proceeds be reinvested to fully defer. An OZ investment requires only the gain — the return of capital is yours to keep, tax-free, and spend. For a seller who wants some liquidity, that is a significant practical difference.
What you must buy. A 1031 requires like-kind real property. An OZ fund investment is an investment in a fund, which can hold real estate or operating businesses in designated zones. You are not buying and managing a replacement building.
The timetable. A 1031 requires identifying replacement property within 45 days and closing within 180. An OZ investment must be made within 180 days of the gain, with no identification deadline.
How the deferral ends. A 1031 can be repeated indefinitely, and the deferred gain can be eliminated by the step-up in basis at death. OZ deferral ends on a defined date, at which point the deferred gain is recognized and the tax is owed.
The long-term benefit. The main OZ prize is that appreciation within the fund can be excluded from tax after a ten-year hold. That is a genuinely powerful benefit — but it applies to the fund's growth, not to your original deferred gain.
The program was made a permanent part of the tax code with meaningful revisions, and the transition runs right through the current year.
The existing program continues for investments made through the end of 2026, with deferred gains under the old rules recognized on December 31, 2026.
New zone designations are being made in a window beginning July 1, 2026, taking effect for new investments on January 1, 2027, with an overlap period for previously designated zones running into 2028.
Post-2026 investments get a rolling five-year deferral rather than a single fixed recognition date, with each investor's clock running from their own investment.
Basis step-up is 10% for standard zones and 30% for rural zones, and there is a thirty-year limit on the gain exclusion.
For a seller closing an LA apartment building sale in the back half of 2026, that seam is not academic. Investing under the current rules means a deferred gain recognized at the end of this year — very little deferral for very little benefit. Waiting until the new rules take effect changes the math considerably. This is a question for a CPA with the actual closing date in hand.
1031 is usually right if: you want to stay in real estate, you want the deferral to continue indefinitely and potentially be wiped out by a step-up at death, and you are prepared to reinvest the entire proceeds and manage a replacement property.
OZ is worth examining if: you want to take some cash off the table, you do not want to own and operate another building, you can commit capital for ten years, and the deferred gain's eventual recognition is acceptable to you.
Neither may be right if: the gain is modest, the recapture exposure is limited, or you simply want the proceeds. Paying the tax is a legitimate choice and it is frequently the correct one — deferral structures have real costs, real constraints, and real risk.
OZ investments are illiquid, ten-year, fund-level commitments in a specific kind of project. The tax benefit is genuine, but it does not rescue a bad investment. Fund selection, sponsor quality, and the underlying real estate matter far more to your outcome than the tax treatment does. A seller who chooses a mediocre fund for the tax benefit has generally made a worse decision than one who paid the tax and invested well.
The same applies to 1031, for that matter — the replacement property is the investment, and the deadline pressure of a 1031 is precisely how sellers end up owning a building they did not really want.
Decide what you want first — real estate or liquidity, active ownership or passive, ten-year commitment or flexibility — and then choose the tax structure that fits, rather than letting the structure choose the outcome. If you are closing in late 2026, get your CPA involved before the closing date is set, because the transition between the old and new opportunity zone rules turns on exactly when the gain occurs.
Can I do both on the same sale?
Not on the same dollars. A given amount of gain goes into one structure or the other. Some sellers split a transaction — exchanging a portion and taking the rest as gain into a fund — but that has to be structured carefully in advance.
Does an opportunity zone investment defer depreciation recapture?
The rules address capital gain. Recapture treatment is a specific question for your CPA on your facts, and on a long-held, fully depreciated LA building the recapture piece is often large enough to drive the whole decision.
Do I have to invest in a zone in Los Angeles?
No. The investment goes into a qualified fund, and funds invest wherever their designated zones are. Your building's location has no bearing on where you can invest the gain.
Michael Sterman is Senior Managing Director Investments at Marcus & Millichap.
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