As laid out by federal law as of December 2017, clients have 180 days to roll their capital gains into Qualified Opportunity Zone Funds, affording them plenty of time to consider the investment in a QOF once they’ve taken their focus off of raising cash from a nervous stock market. Stock investors have just been through the equivalent of a financial car wreck. They’re trying to find their phone, their wallet or purse, the insurance card, checking to see if everything is intact. You get the picture.
Following a nasty stock market correction where the S&P shed 34% and then rebounded off the recent low of 2190, every professional manager is trying to determine if the recent rally off the low is a “dead cat bounce” or the beginning of a “V-shaped” recovery. Opinions are pretty much split right down the middle, but the prevailing narrative, I believe that the market may endure a retest of some magnitude.
In light of this total confusion, clients that are heavily invested in stocks and experiencing the wild swings are likely asking themselves whether they should lighten up on the snapback rally, lock in some short and long-term capital gains and park some cash until some notion of economic clarity unfolds. Most may conclude that we’re in a recession as of March, but no one can predict at this time how long it will last.
On 3/31/20 Goldman Sachs put out its most recent prediction, calling for a whopping 34% decline in GDP for the second quarter. At the same time, Congress is already talking about a Phase 4 stimulus package that is keeping stocks afloat before, I believe we will see a barrage of first-quarter negative earnings, slashed dividends, canceled stock buybacks and lower forward guidance crossing the tape during the next four to six weeks.
So, with all this flux in mind, it might be an appropriate time for advisors to discuss with their clients the prospects on what to do with short and long term capital gains they may have accrued from selling stocks into the current strength, cutting losers and lower quality stocks and raising cash. In fact, some clients may have fantastic gains in what are called the “coronavirus stocks” – Zoom Video Communications (ZM). Teledoc Health Inc. (TDOC), Costco Wholesale Inc. (COST), Citrix Systems (CTXS) and Netflix Inc. (NFLX) to name the most prominent, but there are others.
Once the virus plateaus, these stocks may undergo some fierce profit-taking, but that doesn’t mean the rest of the market is going to return to full health, not when as many as 50 million people might be out of work living on state unemployment support and government bridge checks that run out in July. Again, there is just a tremendous amount of uncertainty.
However, what is a certainty is that when clients raise cash from booking profits, they have removed some volatility from their portfolio, but they may also be faced with paying taxes at either ordinary tax rates or long-term capital gains tax rates. In either case, paying taxes is never ideal if it can be averted. Rotating capital gains into a well-managed and fundamentally attractive Opportunity Zone Fund allows investors to defer paying taxes on gains out to December 31, 2026. For some clients, this is a hugely attractive investment proposition.
Presenting clients with a coherent strategy and action plan designed to protect market gains, preserve capital, defer taxes and possibly maximize income and long-term capital appreciation in new and re-gentrified multi-family housing projects is an action plan that in many cases will not just be a plan, but a possible solution for where to rotate a portion of one’s portfolio assets.
When the stock market stops making sense for some clients, investing in liquid brick and mortar income-producing residential rental property with the potential for appreciation – may make a lot of sense. I view this approach as a path to optimizing and de-risking portfolios of the most extended bull market in stocks in history.
Shares of my company’s publicly traded QOF, Belpointe REIT (BELP) were priced at $100 back on November 30, 2019, and today, trades at $100.75 per share. The underlying assets provide limited volatility in a publicly-traded growth and income tax shelter that consists of 100% newly constructed or fully renovated multi-family rental properties. Plus, these are all domestic properties with no currency risk with the full regulatory backing of federal and state governments.
And one other thing, the rolling of capital gains doesn’t only just apply to financial instruments like stocks and bonds. Clients that have realized gains from the sale of a business, art, collectibles, real estate, precious metals, race horses – you name it – can roll all those gains into a Qualified Opportunity Zone Funds with a 180-day window from the time of sale.
The old saying of “if you fail to plan, you plan to fail” couldn’t be more applicable at a time such as the present. Get up to speed on all that Opportunity Zone essentials that they have to offer so you can make a smart decision if this asset class belongs in your practice.