Tax Savings Strategy: Opportunity Zones November 2021
Have you realized a large capital gain (e.g., selling a business, stock, or real estate for $5M+) within the past six months? If so, investing in a Qualified Economic Opportunity Zone to defer and reduce your Federal capital gain taxes could be a viable option.
Opportunity Zones were created under the Tax Cut and Jobs Acts of 2017 to help spur economic growth and job creation in low-income communities while also providing three key tax benefits to investors:
- Defer Federal (and possibly State*) capital gains taxes until 2026.
*California does not conform but many states do.
- Receive a 10% basis step-up on the deferred gain (if invested before 12/31/2021).
- Receive a permanent exemption from Federal (and possibly State*) capital gains taxes on the Opportunity Zone investment if it is held for more than ten years. *California does not conform but many states do.
Just last week we used Opportunity Zone Funds for a client (CA resident) who sold appreciated stock in August 2021 and realized ~$6M+ in capital gains. Instead of paying capital gain taxes on the entire amount, they deferred $2M into value-add real estate using Opportunity Zone Funds which could appreciate Federal capital gain tax-free after the ten-year holding period. Their total estimated value gained by 2031 is ~$630K.
Opportunity Zones are not appropriate for everyone and need to be carefully considered within the context of a broader financial plan and cash flow strategy:
Opportunity Zones can be used in conjunction with other tax and investment strategies to optimize long-term, after-tax expected returns and can also be part of a multi-generational wealth transfer strategy.
Disclosures: Miracle Mile Advisors LLC (“MMA”) is a registered investment advisor. Values are approximate. The above hypothetical example assumes a California resident and does not conform to the federal Opportunity Zone initiative. The QOZF assumes long-term capital gains are taxed at 23.8% plus the California income tax rate of 13.3%. Investors are subject to the current tax rates at the time of realizing the gain, which is subject to change over time. The above example assumes the QOZF exits all properties after 10 years. The annualized returns are estimates and provide no guarantee of investment returns over the stated time period. Investing in a QOZF involves substantial risk and illiquidity, and the potential tax benefits are subject to policy changes over the stated time period. The above hypothetical example assumes state taxes are paid at the initial sale and the future sale of the QOZF for non-conforming states. The information is illustrative, provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. Advisory services are only offered to clients or prospective clients where MMA and its representatives are properly licensed or exempt from licensure.No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of MMA’s strategies are disclosed in the publicly available Form ADV Part 2A. Past performance shown is not indicative of future results, which could differ substantially.