Welcome to the inaugural issue of Opportunity Zone Confidential. I’m Cody Laidlaw, Editor-in-Chief at Belpointe REIT, the first and only publicly traded Opportunity Zone structure, also 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 Advisor (RIA) community. As you’re about to learn, the goal of this publication is to help RIAs realize greater success by leveraging existing and new business.
In this first in a series of newsletters I will review some of the ins and outs of Opportunity Zones and investing in Opportunity Zones, and, perhaps most importantly, provide you with unique insights that you can use to help grow your practice with Opportunity Zone investing. Throughout this series I will also key you into the many nuances that come with participating in this brand new investment category, explain how you can identify and avoid some of the potential risks associated with investing in Opportunity Zones, provide you with examples of how you might optimize Opportunity Zone investment vehicles based marketplace offerings, and describe for you what are arguably some of the best and most prudent structures to place in client accounts.
The driving focus of this weekly publication is to educate the universe of RIAs seeking to bring immediate and compelling value to their client bases about what I believe to be a truly amazing investment product—a once in a life time opportunity—that allows investors to not only serve the greater good but also potentially generate substantial investment returns while taking advantage of unique tax incentives. I believe that the contents of this series will offer you the opportunity to experience, and to impart on your clients, a genuine financial epiphany, one that will allow you to differentiate your practice from the other estimated 250,000 practicing RIAs.
In my view, when you fully embrace what I’m about to lay out in this series of weekly newsletters, you will possess a high-level of insight as to why Opportunity Zones are such a potentially powerful investment proposition, in addition to the knowledge to employ this groundbreaking strategy into every suitable account in your book. I believe that Opportunity Zones are a phenomenal way to re-balance portfolios with a ground-floor, government-backed program that received extensive bi-partisan Congressional support and which has only been in play for just over two years.The way I see it, there is no substitute for properly timing when to put a credible and formidable investment idea, strategy or asset to work. None. And coming out of the gate in 2020, you could potentially make a wealth-changing difference in your clients’ portfolios and their financial well-being. This is arguably the single greatest pursuit of working as an RIA—to bring substantial financial benefit to people’s lives in exchange for a fair and honest fee. I believe that investing properly and intelligently in Opportunity Zones can fulfill this endeavor on several levels. Now, let me show you how.
What Are Opportunity Zones?
Opportunity Zones were created under the Tax Cuts and Jobs Act of 2017, signed into law by President Donald J. Trump on December 22, 2017. Opportunity Zones are lower income census tracts nominated by state governors and certified by the U.S. Department of the Treasury.The United States has over 8,700 designated Opportunity Zone census tracts throughout the country, in every state and every U.S. territory.
The primary focus of the Opportunity Zone program is to stimulate economic development and job creation, by incentivizing long-term investment in low-income communities. The Opportunity Zone program enables investors to reinvest capital gains into Qualified Opportunity Funds (“QOFs”)—which put that capital to work by financing new construction projects in low-income communities—and, in exchange, investors receive certain federal (and possibly state) capital gains tax advantages.
Why Your Clients Should Invest in Opportunity Zones
Almost all RIAs have clients with deeply embedded capital gains from savvy purchases of all manner of assets with extremely low cost basis, making for disposition of such assets a severe taxable event. Clients who re-invest their qualifying capital gains into a QOF within 180 days of recognition of that capital gain are eligible for the following tax benefits:
- Deferral of Capital Gains Taxes: Capital gains taxes will be deferred until the earlier of the end of 2026, an inclusion event or the date on which an investor sells its QOF investment. Capital gains eligible for deferral through reinvestment in a QOF include both short and long-term capital gains resulting from the sale of a wide array of asset classes, including, without limitation: stocks, bonds, commodities, certain cryptocurrencies, artwork, automobiles, jewelry and real estate.
- Reduction of Deferred Capital Gains Taxes: Investors will receive a 10% step-up in the basis of any capital gains that are reinvested in QOFs, if the QOF investment is held for at least 5 years.
- Complete Elimination of Capital Gains Taxes: QOF investors are exempt from federal taxation on capital gains derived from the appreciation of their QOF investment, if the QOF investment is held for at least 10 years.
- Possible State Income Tax Benefits: Depending on the state where the investor is domiciled and whether that state conforms with federal Opportunity Zone regulations, an investor may be entitled to receive the same federal Opportunity Zone capital gains tax benefits (deferral, reduction and elimination of taxes) on a state income tax level.
In future editions of Opportunity Zone Confidential, which we plan to issue Thursday of every week, I will address how RIAs can incorporate Opportunity Zone investments to help grow their businesses and provide some beneficial information on the following advisory topics:
Diving deeper into the little talked about “no depreciation recapture;”
Discussing specific tax benefits regarding re-investment of prior capital gains;
Addressing how to realize clients gains in appreciated stocks without paying tax;
Addressing prospects for maintaining long-term client relationships by helping clients to diversify their portfolios with Opportunity Zone investments;
Discussing how investments in certain Opportunity Zones can also potentially generate substantial growth of an investment portfolio.
I will also provide you with easy-to-understand examples and charts that clearly illustrate some of the possible wealth-preservation and tax-sheltering benefits of investing in QOFs, as well as examples of how your clients can potentially increase the value of their portfolios by investing in these QOFs.