Opportunity Fund Zone

Share on facebook
Share on twitter
Share on linkedin
Share on email

“A lot of the funds are shots in the dark with the only certainty that you get tax savings on the front end. Don’t let taxes be the cause to going into bad deals”

I did some research on this new Opportunity Fund Zone tax benefits. Below are some notes and ideas. Updated 12/3/18

I’ll be hard at work tracking down Opportunity Fund Zone deals in 2019 since I will be selling four more of my Turnkey rentals.

Note: I’m not a CPA or attorney just putting it out there to help inspire some ideas.

An Opportunity zone (OZ) is a tax-favored investment for people with capital gains.

6-pages in the tax document in the new 2017 Tax Cuts and Jobs Act
Goal to encourage long-term investments in low-income communities across the US.
Every major city has some OZ.
Most of Detroit is an OZ plus large portions of Baltimore.
Allows investors to sell their appreciated assets and invest their realized capital gains into one or more designated OZ.
EVEN STOCKS! Non-like kind assets are OK!
After your selling your appreciated asset you have 180-days.
The longer you hold the more benefit you get (up to 10 years).
1) Defer your original capital gain tax obligations until 2026 or until you sell your OZ investment.
2) Discount of 10% or 15% on the taxable amount of your original gains. If you hold more than 5 years your original cap gains decrease 10%
3) If you hold 10 years or more. You will pay NO capital gains tax on any appreciation.
You can self-certify so you do not need an intermediary like in 1031 exchanges.
No investment minimum.
There are some items that get a little unclear… where you should really consult your CPA.
Check out the IRS opportunity comes frequently asked questions page and additional resources below.
Resources to Google: community development financial institutions fund, CDFI Fund map.
Note: Spending $100 dollars to save $20 dollars is not a wise idea. Just like buying a rental next to Grandma’s house because of your travel there. A lot of specifics are still being played out but something intriguing to augment an already good investment.
Other ideas: Look at the OZ map and try to find the smaller slivers of OZ. This is called “buying on the line” whereas areas improve on the edge of development you greatly benefit.
I would ask your CPA if they know about these opportunity fund zones. If they don’t you might need a new CPA. If you are a current Hui Deal Pipeline Club member I would be more than happy to refer you to some people and then you can see if you work well together.

Of course, the news is blowing this out of proportion to sell attention. Wall-Street Journal article.

WSJ 2

WSJ 3

There is a lot of rumors floating around how this tax will be implemented later this year. One of these rumors suggests that we might not qualify for the Opportunity Zone Fund. See second to the last page of the attached where they state that we have to do improvements that is the same as the basis in order to qualify.
Here are some other notes that a buddy of mine took:
  • Temporary tax deferral on reinvested capital gain until 12/31/2026 (from stocks/sale of a business/real estate partnerships/direct real estate sale)
  • Elimination of a portion of the reinvested capital gain over the term of the investment.
    • 10% if invested for 5 years
    • 15% if invested for 7 years
  • Permanent exclusion (100%) of gain on appreciation in excess of initial capital gain investment if held for 10 years.

This means if you have sold an asset whether it be real estate, stocks/bonds, partnership interest, cryptocurrency or a business, you can reinvest that capital gain within 180 days and defer taxes, reduce those taxes by 15% after 7 years of holding and eliminate any capital gains created on the new asset after 10 years.

Post-tax Internal Rate of Return (IRR) increases by a staggering 50% when you invest in a Qualified Opportunity Zone Fund! 

This is different from a 1031 exchange which only allows you to exchange like-kind investments and also requires an intermediary (this program does not need an intermediary).

It’s worth noting that the intent of this tax incentive is to help spur development and economic activity in “distressed communities”.  So this really is an opportunity to do good and do well.  

I have a boatload of income this year, is a OZ project something I should look into?

The OZ is a pretty sweet tax haven and works in theory but I just caution that in the end of the day you are putting money into a shitty area. If you take the tax hit today you will lose 50% but if you invest in a crap area that does little growth then you might lose all of it in a 10 year period.
Here are a few options:
1) Go into an opportunity zone fund – these things will be a shot in the dark and my concern other than not knowing these people personally is that these types of fund are a ponzu scheme waiting to happen. We could go with a Vanguard one which I am sure is “reliable” but the yields will be super low like 2-6%. The other funds that I were looking at are 6-10% a year. Perhaps we can spread it all around :/
2) Find a 2-12 unit in a cash flowing area and run it as a mom and pop yourself

Definitions:

Qualified Opportunity Zone Business – A trade or business. • Substantially all of its tangible property (whether owned or leased) is Qualified Opportunity Zone Business Property AND • At least 50 percent of its gross income must be from the active conduct of a trade or business in an Opportunity Zone, • A substantial portion of its intangible property must be used in the active conduct of its business in an Opportunity Zone, • No more than 5 percent of the average unadjusted basis of its assets may consist of “non-qualified financial property,” • Cannot be a golf course, country club, massage parlor, hot tub facility, suntan facility, racetrack or other gambling facility, or any store the principal business of which is the sale of alcoholic beverages for consumption off-premises

Qualified Opportunity Zone Business Property – A tangible property used in a trade of business if: • It is acquired by purchase (as defined in Section 179(d)(2) related party rules, but using a 20% related party test instead of 50%) after December 31, 2017; • The original use in the Qualified Opportunity Zone commences with the Qualified Opportunity Zone Business OR • The Qualified Opportunity Zone Business substantially improves the property; and • During substantially all of the holding period for such property, substantially all of the use of such property is in an Opportunity Zone.

Substantial Improvement Test: • Property is treated as “substantially improved” if, during any 30-month period beginning after the acquisition of the property, additions to basis of the property exceed an amount equal to the adjusted basis of the property at the beginning of such period. • Land excluded

Resources:

Article on Opportunity Fund Zones – https://drive.google.com/open?id=1F8wDToyb9olvq52U9LRMD8cBrJILm8q_

Article on OZ

Kohlers article

Yardi “White Paper” on OZ

National Law Review about Qualified Opportunity Zones

***If you are a Hui Investor please email me for the secret report on these Zones***

Cost Segregation & Bonus Depreciation

Has anyone invested in these Opportunity Zone funds?

 
Close Menu

SEE The Deals!

Speadsheets, mindset hacks, networking opportunities and more.  Ready To Invest With us?  

Free 15 minute
chat with Lane!

Our analytics tell us most people stay on this page for 78 secs…

so we figure you are a self-starter… or someone to went to school for too long.

No baseball glove needed… there is no pitch coming 😁