Investing in THESE Markets could save you MILLIONS... - YouTube

Welcome back, everyone.

Today, we're going to talk about opportunity zones.

Now I mentioned this in a couple of other videos,

I wanted to get into a little more detail, so you knew what these are all about.

Now again, if you have any other topics that you want me to go over.

Comment down below.

Let us know so we can get it out there for you.

Get you the information that you want.

So again, getting back to opportunity zones,

this is something that's only been around for almost four years now.

The idea behind it was to incentivize investment in a certain area.

So let's start off first.

Obviously, we want to know what the benefits are

because there's not enough benefits.

We don't want to bother with the rest.

There's three main benefits for opportunity zones.

The first one is the deferral of a game into an opportunity zone.

So if you're selling an asset and it generates a gain

and you invest it in an opportunity zone, you will defer that game instead of

recognizing it, and you will pay the tax instead for the tax year December 31st.

2026.

So means you're paying the tax and spring of 2027.

So right now, that's about a five year deferral.

So you know, it's not the biggest benefit, but it's also nothing to sneeze at.

The second one, the permanent exclusion of up to 15% of the gain

that you deferred and invested into the zone, the 15%.

It's kind of phased in depending on when you invested really the third

and final benefit that you want to look at and see if it's worthwhile.

And this is the permanent forgiveness of the appreciation in that investment.

So let's dove into a little more about how these actually work.

So there are two parts to it.

There's a taxpayer that has the gain.

Maybe that's you individually.

Maybe it's a partnership.

You're invested in something along those lines.

You would invest into what's called an opportunity zone fund.

And this is really just a partnership

or a corporation that elects to be an opportunity zone fund.

And then that fund would then invest in the actual property

that is located in opportunity zone.

So you can't just simply invest directly into the property.

You really have to set up the correct structure,

which is one of the complex areas and why I say it really has to be worthwhile.

So what gains are eligible?

Well, essentially it's anything taxed as a capital gain

and really an important part of your of it underlying unrelated person.

So in other words, you can't generate a gain by selling it to a family member

or someone that's related to you for tax purposes and then defer that gain.

You know, just to get these benefits, it has to be yourself.

So it's not related to you.

And so, you know, there's it's anything like

that's taxed as a capital gain, like I mentioned.

But kind of the items that I would mention is it could be a short term

capital gain.

So that's something held for less than a year

and that's generally taxed at your ordinary rates.

But it's still a capital gain that would be eligible for deferral long

term capital gains, which are essentially items held for more than a year.

That would be eligible.

Now I reference 12.31 gain, and that's getting into the tax code.

But essentially,

all you need to know about that is that's the gain on the sale of real estate.

So it's just a special area of the code that says, Hey,

if you sold a business asset, which real estate

a lot of times is we're going to treat it as capital

and then 1250 again, referencing the code section.

All you need to know about this and check out the other videos

on how gains from the sale of real estate tax.

This is your depreciation recapture, so deductions that you took in the past.

You pick up later on the sale.

That's all I'm referencing.

There is that special recapture that although it's not taxed

at the regular capital gains rate, it's kind of a subset of capital gains.

And so that would be eligible.

And really, the point that I want to get across here is that

there's a lot of flexibility in the type of gains that may be eligible.

So just because it's not a long term capital gain doesn't mean

that it doesn't qualify.

And the other important thing is it could really be the gains from anything.

It doesn't have to be the gain from the sale of real estate it can be

could be the gain from the sale of a business.

These provisions do expire so this you can only do this until December 31st.

2026.

That's kind of a drop dead date that you have to have an investment

in an opportunity zone to get these benefits

and something to just kind of know about this.

We're deferring gains, right?

That was our first main benefit.

Well, it's important to know

that you really have to consider potential tax rate changes.

So today the.

Highest capital gains rate, maybe 20%.

But if you've been keeping up with some of the proposals,

they're talking about upping it to 25% and who knows what

it'll look like in the future.

But whenever you pick up that gain in the future,

you're going to be paying tax at that rate under those provisions, not today's.

So you really have to consider that when you're doing this analysis now,

just like 1030 ones, there's time requirements,

although it's a lot easier with an opportunity zone.

So similar to a 1031, you have 180 days to move.

Those gain dollars into an opportunity zone investment,

one incredibly big benefit for opportunity zones over 1030 ones.

So you don't need a qualified intermediary like an a 1031.

You can actually take the cash,

put in your own bank account and then invest within 180 days.

In fact, I don't even have to be the same cash income from any source.

All they're really looking at is what's the gain amount

and how much cash did you put into the deal?

So let's get a little more into, well, OK, we reference to qualified

opportunities on fun, but how does it actually qualify as being one?

You know, like I said, there's a lot of compliance will kind of keep it

as simple as we can, but give you enough information

to have an idea of whether this may be worthwhile .

So essentially, it's an entity.

It's either taxed as a corporation or taxed as a partnership,

and 90% of its assets must be in an opportunity zone.

So this basically means that you look at the balance sheet and let's say

you start with cash and then you have your investments in different property.

Well, the biggest thing you're really looking at

is how much cash do I have compared to total assets?

You can't have too much because cash is in an opportunity zone

and you can't have an entity holding a ton of different properties,

including ones that are not in a zone because you'll also

fall outside these provisions.

That's really the biggest thing that you need to know.

Otherwise, it's relatively simple to create this once you have the entity

set up, it's a matter of elections and having the right things in the agreement.

But really, that's all it is from that perspective.

And then when you have that

couple of options, you can either directly invest

in opportunities, own property, real assets,

or you can kind of do it in one of these indirect ways where star the most common,

it owns another entity that then owns the assets,

and we won't get into why that's critical on the majority of the time, but

just know that that's one of the ways that we achieve some of the good benefits.

If you're doing one of these indirect ways

and this is one of the benefits in order to qualify

as an opportunity zone business or something that a fund can invest in,

at least 70% of its assets have to be an opportunity on own property.

So you do the math on that.

Start at the upper layer with a fund only 90%.

It has to be in opportunities, own assets and let's say its asset is this business.

Within the business, we need 70% of its assets.

So you actually when you go down the layers,

maybe at the end of the day, only 60% is opportunities on assets.

And so that could be a great planning tool, depending on the types of property.

What qualifies?

You know, we won't get into the details, but just know that that's something

that with a lot of clients of mine, we've worked around those rules

to make something qualify that may otherwise have not qualified.

And then again, I'm not going to get into all the details of this, but

you kind of have some things on the screen to reference.

But essentially, we need to define what

opportunities on business property is, and it's essentially

something that you've acquired after this law came into effect.

So after 2017 and it has to be from someone unrelated.

Now this is probably one of the most important things to remember.

This is what trips people up a lot.

So you can't have already had, you know, land

that you wanted to build on before 2017 and then all of a sudden say,

Oh, it's an opportunity zone, let's go ahead and reap these benefits.

It doesn't work that way.

If you already owned it and you can't say, Oh, you know,

my family member has this piece of land, I'll just buy it from them that way.

At least one of us gets the benefits because they would be related.

So you can't do that either.

So it really has to be something you've acquired after 2017

that comes from someone that is a third party to you.

So that's really the biggest item to remember.

And then I just really want to go over here

the major differences between a 1031, because that's something that,

you know, probably everyone's familiar with at this point.

Maybe you've done them in the past.

And then comparing that to doing an opportunity zone investment

because I think a lot of the times, depending on the situation,

opportunities on investment may be a better choice in the long run.

So first big difference with a 10.31, whatever

the selling prices, that full amount has to be in the replacement property.

Well, for an opportunity zone, you only have to invest the gain,

so you may be able to invest a much smaller amount to reap the benefits.

And that can be huge.

Next part, and I kind of already mentioned this is where the 1031 there's

very specific rules around

needing basically not touching the money

before you acquire the next property, so you need a qualified intermediary.

This is all out.

The window with an opportunity zone doesn't matter.

That makes it much easier to execute.

And then with a 1031,

this one, especially at a fast moving market

or maybe an inflated market,

this can be really difficult for 1031 you have to identify. Buy

whatever property you want to replace with the for the one you're selling

within 45 days, even though you have 182 actually close on the property.

So that really puts,

you know, a crunch on your time with opportunities or investments.

There's no ID, period, as long as you've invested within 180 days.

Whenever you realize the gain, you're set another one.

Big differences eventually, the gain on the 1031,

it's going to be recognized, the gain you deferred

and the gain on the replacement property

will be recognized with an opportunity zone.

You can receive an exclusion

on your deferred gain for up to 15%.

Plus you can get permanent forgiveness on the new investment.

So that's a huge benefit.

And that's really why a lot of times this may be a better choice

when you compare them side by side.

So another difference and this one is just I'd say this kind of

is equal between them with a 1031

you have to acquire like kind of property.

And what this essentially means is if you're selling real estate

and now you can only exchange real estate before you used to be able to exchange

other types of assets.

But now you can only exchange real estate.

Well, most real estate a lot of times is like kind under the tax code.

So you can replace, say, an office

building with residential or you can replace land with a building.

You know, there's some flexibility there with an opportunity zone.

You know, you can really.

Does it have to be light kind?

You could.

You could sell stock and acquire an operating a business.

But your limitation comes in where you have to find something

that's actually located in one of these zones.

So that can be the challenge.

Now, the last part

that really makes the difference is in partnerships.

1030 ones can be a challenge

because a lot of times there's disagreement between partners.

one may want to take the cash and run and do something on their own.

Maybe there's been a disagreement between the partners and they want to split up

and or maybe one partner wants to defer and acquire some property,

and it becomes a real planning challenge to really execute

those differences between the partners, the opportunities or investment.

You can have a partnership generate some kind of gain.

So you had a real estate partnership, it sold something at a profit.

Well, you all can do your own thing, right?

one person can choose to take the cash and go.

Another person can choose to invest in an opportunity zone.

You don't have to do the same thing, and that's a huge benefit.

So just to kind of wrap up here,

I, you know, opportunity zones, they have huge opportunity

as their names just incredibly complex.

So make sure if you're interested in this, talk

to a tax advisor, do your research ahead of time.

You don't want to try and set it up and then find out that you blew it later.

So it's been great chatting with you again and again.

Let me know if there's any other topics you want to explore.

I look forward to seeing you next time.