SS59: What Are Qualified Opportunity Zones?

Want to defer or reduce capital gains? Charles discusses what investors should know about the tax benefits of investing into opportunity zones.

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Talking Points:

First off, always consult a tax professional before investing – especially in Qualified Opportunity Zones
The 2017 Tax Cuts and Jobs Act established the Qualified Opportunity Zone program to provide a tax incentive for private, long-term investment in economically distressed communities.
Investors in these programs are given an opportunity to defer and potentially reduce tax on recognized capital gains.
Tax savings are only available when investors retain the investment in a Qualified Opportunity Fund for the time frame stated.
How this may help you? Are you facing a significant tax liability because of capital gains? Investing in a Qualified Opportunity Zone Fund may be a viable option for you.
What is an opportunity zone?
- An Opportunity Zone is an economically distressed community that provides preferential tax treatment to long-term investors under federal tax rules.
- For an area to qualify as an Opportunity Zone it must be characterized by either of the following:
  - a poverty rate of at least 20 percent, or
  - a median household income that is less than 80 percent of the median household income of its neighbors.
- There are more than 8,700 certified opportunity zones. They are located in every state; Washington DC and 5 US territories.
- Not all locations are rural or inner-city.
What are the federal tax benefits? The 2 main benefits are:
- Number 1 is the deferral of the capital gain reinvested into the opportunity zone – until 2026; payable in 2027
- Number 2 is if the qualifying investment in the opportunity zone is held for more than 10 years; its tax basis increases to fair market value as of the date you sell it; in other words, the qualifying investment in the opportunity zone appreciates tax-free; so there will be no capital gains when you sell it.
- Check with your tax professional about state tax implications.
What are the requirements for a Qualified Opportunity Fund?
- A Qualified Opportunity Fund must invest at least 90 percent of its assets into Qualified Opportunity Zone Properties
- These can be indirect or direct investments
In conclusion, if you have capital gains and you are able to reinvest them; investing in a Qualified Opportunity Zone Fund might be a great solution; to reap the full rewards; I would keep your funds invested for over 10 years so that the gains from the fund are not taxable.
One thing that was not mentioned in my research was inflation. If you are deferring taxes for several years; so in the future, you are paying taxes with dollars worth much less. Just figure out from the time you invest in the Qualified Opportunity Zone Fund to early 2027; what will inflation be and you can see the additional hidden discount you are receiving.
Where do you find a Qualified Opportunity Zone Fund? Speak to your financial advisor and they should be able to direct you to a firm that offers them but, going direct to the actual fund operator; will dramatically reduce fees. A financial advisor of mine introduced me to a firm that connects you with an operator, and the fees were upwards of 8-10% vs. going direct to fund operators where the fee was only 1%-2%.
Always consult a tax professional before investing

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what are qualified opportunity zones. Now, first off, always consult a tax professional being for investing, especially in qualified opportunity zones, cuz everyone’s, situation’s a little different. Now the 2017 tax cuts and jobs act established the qualified opportunity zone program to provide a tax incentive for private long-term investment into economically distressed communities. Now investors in these programs are given an opportunity to defer and potentially reduce tax on recognized capital gains tax savings are only available when investors retain the investment qualified opportunity fund for the timeframe stated now, how will this help you? Well, are you facing a significant tax liability because of capital gains doesn’t have to be just in real estate. It could be in stocks or in other form, investing into a qualified opportunity zone fund may be viable option for you.

Charles:
So what is an actual opportunity zone? Well, an opportunity zone is an economically distressed community that provides preferential tax treatment to long-term investors under federal tax rules for an area to qualify as an opportunity zone. It must be characterized by either the following a poverty rate of 20% or a median household that is less than 80% of the medium household income of its neighbors. Now there are more than 8,700 certified opportunity zones right now, and they are located in every state, Washington, DC, and five us territories, but not all locations are rural or inner city. When you hear the economically challenged areas and stuff like this, most investors are going to refrain from looking at it and feel like, okay, that’s not where I want to be investing, but a lot of the certified opportunity zones are in areas that you might be investing in any way.

Charles:
So it’s very important that if this is you with a lot of capital gains, a qualified opportunity fund might be something that helps you. So what are the federal tax benefits? Well, the main two benefits are number one. There’s a deferral of the capital gains reinvest into the opportunity zone until 2026. So it’s payable the beginning of 2027. And number two is the qualifying investment in the opportunity zone is held for more than 10 years. Its tax bases increases to fair market value. As of the date, you sell it. In other words, the qualifying investment in the opportunity zone appreciates tax free. So there’ll be no capital gains when you sell it. Now make sure you check with your tax professional about state tax implications. I’m not gonna go through ’em here. There’s tons of different states within income in taxes, but this is just on federal taxes, but what are the requirements for a qualified opportunity zone?

Charles:
A qualified opportunity zone must invest at least 90% of its assets into qualified opportunity zone properties. And these can be indirect or direct investments. Now in conclusion, if you have capital gains and you’re able to reinvest them, investing into a quality opportunity fund might be a great solution to reap the full benefits. I would keep your funds invested for 10 plus years so that the gains fund the fund are not taxable. And that’s just a sign note. That’s something very important to ask the operators of the fund, because if you don’t need the funds and you just like them to grow tax free, you don’t want the fund the close after 10 years. You probably want that. If it’s good properties that they’re investing in, it’s very diverse, all this kind of stuff geographic diversity, and then property diversity. You want to probably hold it for as long as they can.

Charles:
15 years, 20 years plus, I mean the longer it’s just growing tax free. So make sure you speak to your operator, make sure that where they think the, where, what their plans are, where they think this, the opportunity fund will end where they’re gonna close out, where they’re gonna sell the properties, make sure that aligns with what you want to do with your funds. One thing that was not into my research was inflation. Now, if you’re deferring taxes for several years, you’re paying with dollars worth much less. Just figure out from the time you invest in the qualified opportunity zone to early 20, 27, what will be inflation and you can see the additional hidden discount you were receiving. That’s not talked about now. Obviously we’ve had a lot of inflation here in the United and it’s not gonna probably slow down anytime in near future.

Charles:
So you can see that you’re gonna be paying in 2027 with dollars that are worth a lot less than you would be this year. Now, where do you find a qualified opportunity zone fund? I would speak to your financial advisor and they should be able to direct you to firm that offers them, but going direct to the actual fund operator will dramatically reduce your fees. Now, a financial advisor of mine introduced me to a firm that connects you with an operator and the fees were upwards of 8% to 10% versus going direct to a fund operator that I, I had known for years. And the fee was 1%, the 2%. So it, you have to make sure that you’ve really comparing apples to apples and that you have the same timeframe. The fees are where you want it to be. And you know, always consult a task professional before investing and especially in these qualified opportunity funds because they can be very different from your typical syndication. Also, they can be very difficult from, or very difficult where you’d be investing in a regular property because there’s so many different nuances and you have to be a passive investor with it. So thank you for listening. Please remember to rate, review, subscribe, and submit comments and potential show topics at global investors, podcast.com. Look forward to two more episodes next week. See it then

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