This is the fifth video in the series. In the first four, we identified real estate investment opportunities, we discussed the challenge of capital gains and depreciation, we talked about using 1031 exchanges to defer that depreciation. But is there a way to just eliminate those capital gains?
A qualified opportunity zone. What is it? It’s essentially a designated geographic area, usually a low-income community, and it’s designated within the rules of the Tax Cuts and Jobs Act of 2017. It is designed to incentivize investment in areas that are underserved financially, that need economic development.
There’s a whole debate as to how effective this has been, but that’s not the purpose of this video. If you invest a high capital gain rollover into a qualified opportunity zone and you hold it for five years, 10% of those capital gains that you invested on top of the gains in the investment in the opportunity zone are now tax-free. Seven years, 15% of those invested capital gains are wiped out. 10 years, up to 100% in some cases. Up to 100% of the capital gains that you reinvested in that qualified opportunity zone are wiped out over and above the capital gains on the investment. This is one of the few deals where you can get rid of capital gains without dying first, which is for some people attractive.
Now, I always warn people – don’t let the tax tail wag the dog, and what I’m saying here is to make sure the opportunity zone makes sense on its own merits before going after these other tax breaks. If it’s a lousy investment, so what if you wiped out the tax on your gain, but you lost half of your money on the investment? It doesn’t make sense. So we want good investments but there are a slew of great opportunities. It doesn’t take a rocket scientist to know that if you think you might need this money in less than 10 years, that’s not the deal for you. Some advisors will say, “Oh, five years is fine.” 10% of your capital gain is all that’s saved in 5 years. It’s a long-term liquid investment. It may be focused on capital gains, not income. It depends on the specifics of the investment. So, make sure that the deferral of the gains elimination justifies the strategy.
Qualified opportunity zones are very complex investments. We have friends of Avion that invest in them on a fairly regular basis. There’s a lot of them around Austin and Houston, in fact. If you have further questions about this or want to be introduced to some of these opportunities, we don’t sell them. That’s not our business. We’re advisors, fiduciaries, but we can make introductions. Give me a call, send me an email. I always look forward to helping you enjoy the best of real estate investment success.
Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.