Streamed: Tuesday March 1, 2022
Duration: 18 minutes
About This Webinar
Learn more about Opportunity Zones with this webinar from Moskowitz LLP
Welcome back, folks. Now, we’re going to talk to you about opportunity zones and the hits keep coming. Now, what’s happened is the Congress in their infinite wisdom have always found real estate a favorite area. They like real estate, and they give us all these benefits. During the tax cuts and JOBS Act, the opportunity zones were created. Essentially what the opportunity in zones are, there’s a lot of properties listed throughout the United States and the territories like Puerto Rico, where if you invest in them, the government gives you multiple benefits.
Now, let’s talk about the first one. The first one is if we go ahead and go into an opportunity zone, we can sell any investment, any investment. When you have a capital gains, you have 180 days to elect to go into an opportunity zone. Benefit one is this goes ahead and let’s us defer our capital gains taxes until 2026. This is a backdoor way to take advantage of some 1031 advantages that were taken away from us for non-real estate. But we can talk to you about that more in a separate webinar.
The bottom line is here, so number one, we deferred our capital gains and another nice thing here that is separate and apart and over above the 1031, if you choose to, you can choose to just do part of the capital gain into the opportunities zone. That’s one benefit. Another benefit is if you hold the property long enough, you can be forgiven an unlimited amount of capital gains. If you have a capital gains on this, a zillion dollars, your tax on that could be zero if you follow these rules.=
Now, you say, “Well, okay, tell us more about these opportunity zones.” Besides going ahead and saving you a bunch of taxes, this gives us an opportunity, forgive the pun, to help the country socially. It does social good. These properties are in some challenged neighborhoods. Now, somebody says, “Now, wait a minute, wait a minute here, I don’t want to lose my money either.” There’s still another benefit.
You only have to invest 63% of your investment in the opportunity zone, and the other 37% can be the fanciest neighborhoods in the country. Let’s look at that for a minute. Now, think about that. You have a challenge because you say, “Well, what are these opportunity zones going to do?” And as we know, throughout the country, there’s a big part of something… Sometimes people call it gentrification where challenged neighborhoods turn around, and then they become very desirable neighborhoods and the property values shoot through the ceiling.
But in addition to that, 37% of your investment can be anywhere else in the country, in really fancy real estate. The bottom line is you can qualify to not pay capital gains on any of this. That includes the challenged area and the fancy area. The benefits here are tremendous. There’s all kinds of details that we should know about. I’d like to turn the floor over to my friend and colleague tax attorney and accountant Cliff Capdevielle. Cliff, take it away.
Thanks, Steve. As you mentioned, these opportunities zones are in what are called distressed communities. Those are designated by the governors. There are qualified opportunity zones in every one of the 50 states. And as of now, all of Puerto Rico is eligible. There are many, many zones. As of today’s date, there are almost 8,800 zones throughout the country. It’s not a small piece of the country that’s eligible, but they are essentially in low income neighborhoods, distressed communities.
That said, there are many, many parts of the country where this is eligible. And importantly, Steve, in contrast to the other credits that we’ve discussed so far in this series, the opportunity zones and becoming an opportunity zone fund is really very easy compared to some of the other programs that require certification from outside agencies. All you need to do really is identify a property and, as you said, make that investment within a 180 days of cashing out of your current investment.
Who is this for? Well, we have many, many clients now who have made millions of dollars in cryptocurrency, for example, the last couple of years. Now, as you know, Steve, the 2017 tax act did away with 1031 exchanges for everything except real estate. If you made a lot of money in cryptocurrency, if you made a lot of money in the stock market last couple years, you’re sitting on a pile of cash. You’re about to pay a bunch in taxes. Guess what? Opportunity zone investments are really a great way to go.
Why? Because you can defer all of that gain, potentially exclude a lot of it, and dramatically reduce your tax bill. This is possible still even for your 2021 tax bill. If you’ve sold property, cryptocurrency, stocks, and bonds in the last 180 days, still potentially an opportunity to do this. What’s involved? Well, there’s two ways to go. One is through an existing fund.
If you were to take your gains from cryptocurrency or stock market, other investments and invest those into a fund within 180 days of the sale, then you can defer those taxes. Well, what if you want to do this on your own? Is that realistic? Absolutely. All you need to do really to become a qualified opportunity fund is to set yourself up as a corporation or partnership, and then buy an appropriate investment. It’s very different from the historic building credits that we talked about.
The new markets credits, as we mentioned, is very valuable credit, up to 39%. But guess what? It is very competitive. There’s about five or $6 billion available for the new markets credit every year. It’s typically over subscribed to the tune of 15 to $20 billion. It’s going to take some time to put together a new markets credit investment. Not so for an opportunity zone. We can get you going with your opportunity zone investment in a week or so. That’s really all it takes.
If you’ve identified a property, you just need to set up a corporation or a partnership. And as long as you meet the other qualifications in terms of investing in a distressed community, then it’s going to work. It’s a self-certification process. What we do is we make that election on your tax return. Let’s say it’s 2021 sale and you’ve invested in an opportunity zone within 180 days. You make the election to defer that gain. And then when we set up the fund and we report that, it’s a self-certification process.
As long as you report this correctly on your tax return, guess what? You’re going to get the full benefit of that deferral. Again, this is for investors who are looking to defer that gain. We can do that for you and it doesn’t take an enormous amount of time, but the benefits are tremendous. Steve, who else would this work for in terms of investing in a qualified opportunity fund?
One of the things that I like to point out with this, a lot of people get discouraged and say, “Oh sure. This is something so the rich get richer and I’m just a middle class guy, and I work for a living.” Folks, this is for anybody that wants to invest in it. This works really well for a regular middle class person or a person in any socioeconomic situation. What it allows you to do is, again, save a lot of taxes. And instead of paying that money off to the IRS and it’s gone forever, you use money that you would’ve paid to the IRS to invest for yourself.
And then through this opportunity zone, you can make a tremendous profit, not pay a penny of capital gains tax on it. Reinvest that, and then you can become the person that others that didn’t take this webinar don’t know about these things point out and say, “That’s so unfair. That guy makes all that money and doesn’t pay these taxes.” This is perfectly available to everybody, especially middle class. All you have to do is know about it. Knowledge is power and that’s what we’re trying to do for you and explain all these things to you.
They exist. You don’t have to get hung up with the technicalities. We can do that for you. You want to know they exist, and it’s a tremendous alternative to paying taxes, making money for yourself.
Yeah. The rules are fairly simple. You just need to invest at least 90% of the investments must be in qualified opportunity zone property.
And then the company takes 70%. That’s how I came up with the 63% earlier. The IRS and the regulations were very, very generous here. There’s two factors. The 90% that Cliff is talking about. Also, in a different section, the 70%. We multiply 70 times 90, we come up with 63. That’s what we’re talking about. The government has been so, so generous here.
Really that’s all that’s required is that you invest through a corporation or partnership. You invest most or all of the gain in the qualified opportunity fund, and that you do that within 180 days of the sale. That’s really about it. It’s not very complicated. It’s not very difficult in order to get certified as a qualified opportunity fund. As I said, this is all self-certification that we will do for you on your tax return. If you do those few things, you’re going to be eligible to defer a lot of taxes.
Again, this is for any investors who cannot use a 1031 because of the type of property, or that you did not… With the real estate investment, if you did not set up a simultaneous escrow and you’re disqualified from a 1031, you can use a qualified opportunity fund to reinvest that money with tax deferral.
Or if you don’t want to do a 1031. Another thing that we like to point out, and I’ll just touch on it because we talk about it in other webinars, is that when somebody gives you something nice, what do you say? More. You want more. You can combine these benefits, so you have an investment and then you can combine it with other things like cost segregation where you say, “Okay, now I have a real property that’s giving us something beautiful, a positive cash flow.”
That means that the amount of money you take in is more than your expenses. But a paper loss, a tax loss, you don’t write a check to depreciation. You can make a tremendous cash profit on the property and legally not pay any taxes on it because of depreciation. And then if your depreciation gives you a paper loss, if you otherwise qualify, you can come in as an exception to the passive activity loss rules and write-off that additional loss against a portion of other income like dividends, interest, wages, profits from a business.
You can combine these things. We’re concentrating on opportunity zones. But before you just fixate on that, the benefits keep coming and coming and coming. If you make an investment in real property, part of the benefit is the opportunity zone. But we can combine the opportunity zone with accelerated depreciation, with having an exception to the passive activity loss rules. If you’re married, only one spouse has to qualify. This gives tremendous benefits.
Not only do you wind up saving taxes here, you can save taxes in other areas. That’s tremendous benefit. Again, remember, the Congress gave favor treatment to real estate. It’s not just this. It’s a whole bunch of factors put together. And now back to Cliff.
Yeah, that’s exactly right, Steve. The real power here is stacking these benefits, taking advantage of accelerated depreciation, cost aggregation, and also the other credits, the historic building credit, for example. If you’re lucky enough to find a historic building, guess what? You can take that credit and use the opportunity zone.
Just to refresh your recollection with the credit that Cliff mentioned, if we can get you qualified for that, the government effectively through credits pays for 39% of your building cost. Imagine that? You choose a building. And if you choose the right one, it only costs you 61% and the IRS writes the check for the other 39%. My God! These are tremendous benefits. Over and over again, I want you to remember, Congress has favored real estate.
You too. Anybody of any socioeconomic class, especially middle class, can take advantage of this and make tremendous profits instead of paying taxes, and then not pay taxes on those profits. It’s very exciting.
Steve mentioned the new markets credits is up to 39%. What we’ll do as part of a free consultation for you is talk about how to combine the various credits along with accelerated depreciation.
My personal favorite, the combinations.
Absolutely. Maximizing your interest deduction. That’s all. That’s all part of our free consultation for you. If you send us your email, we can send you a list of the opportunity zones in your area. You specify areas you’re interested in investing. We’ll send you an email with those opportunity zones, and then you can set up a free consultation to talk about it more with Steve.
Folks, thanks so much. You can also call us at 888-TAX-DEAL. That’s 888-TAX-DEAL, or moskowitzllp.com, M-O-S-K-O-W-I-T-Z-L-L-P, dot com. Thank you for listening to us and enjoy making all this money and saving all these taxes.