Cody Laidlaw here, Editor-in-Chief at Belpointe REIT, the first and only publicly traded Opportunity Zone structure, with the goal of bringing informed opinions and facts to the forefront of discussions regarding all things encompassing and investing in Opportunity Zones for the Registered Investment Advisory (RIA) community. This forum is dedicated to leveraging success from existing and new businesses.
On a weekly basis, I’ll be highlighting specific views and benefits of investing in Opportunity Zones with the goal of dissecting the investment proposition that makes it easy to understand and communicate with clients that are suitable for such an investment.
In this second weekly edition in what will be a series of newsletters, I’m going to bring into focus how an alternative investment strategy in Opportunity Zones provides a highly appealing way to diversify portfolios that offset the risk of black swan events like the Coronavirus situation that has put stress on the stock market.
Black swan events, by definition, is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit in hindsight. Examples of black swan events would include the 911 attacks on the World Trade Towers and Pentagon, the Category 5 Katrina hurricane in New Orleans, the Northeast blackout of 2003, the Iranian crisis last month, and the program-trading crash of 1987.
Today, it’s the Coronavirus that is spreading fear among investors, and not so much because the fatality rate of 2% is such a threat, but the widespread interruption of the global supply chain that could send the world’s economy into recession. This is a different kind of threat because the world’s businesses and industries have never been more intertwined and a great deal of the risk is outside the control of the U.S.
As such, the unknown quantity of risk associated with these forces out of America’s control are resulting in a major spike in market volatility. Adding to the market’s angst is the notion of widespread revisions of lower Gross National Product figures yet to cross the tape from several countries that are heavily dependent as supply chain exports along with the rise of Bernie Sanders as the Democratic front runner – for now.
It’s times like these that having a portion of your client’s portfolio invested in income-producing U.S. real estate that isn’t subject to stock market volatility makes for a more solidified relationship between the Advisor, RIA and the client. Being invested in Opportunity Zones means positioning capital in brick and mortar projects located within U.S. borders where there are strong government regulatory tailwinds and hugely favorable tax advantages where revitalizing communities of hardship are the focus of the program.
Clients with deeply embedded capital gains in equities who are looking to lower their risk within their portfolios from stock market volatility are excellent candidates for investing a portion of their assets in Opportunity Zones funds. One of the single greatest benefits for clients that invest in a Qualified Opportunity Fund (QOF) is they can reduce capital gains liability for the current 2020 year they book those gains and defer having to pay the tax on those gains for five years.
For clients that are still working, earning large incomes now, that plan to retire by 2026 and move into a much lower tax bracket – this is a highly attractive proposition for them to consider. The current basic capital gains rates are 0%, 15%, and 20%, depending on one’s taxable income. A savings of 5% on a capital gain of $500,000 is real money.
No matter if their capital gains are derived from short-term or long-term investments, those gains, if invested within 180 days of the sale of the asset and into a Qualified Opportunity Fund (QOF), tax payments for those capital gains are deferred until 2026 and all the capital appreciation achieved from the properties within the Opportunity Zone Fund are free of taxation, similar to how a Roth IRA functions.
Investing in Opportunity Zones is a splendid method by which to diversify risk in non-correlating assets to the stock and bond markets. Real estate is a hallmark of high net-worth investing – specifically tax-sheltered income real estate. The unique structure of Opportunity Zone Funds offers many benefits of which I’ll continue to bring to light, but today’s column was to raise the awareness of how to insulate clients’ capital from undue market risk and solidify trust and longevity to an Advisor’s and RIA’s relationship with their client base.
Don’t hesitate to call me if you have any questions regarding Opportunity Zones and/or investing in Qualified Opportunity Funds.
125 Greenwich Avenue
Greenwich, CT 06830