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Opportunity Zones for Real Estate Strategies (Explained) - YouTube
Channel: Toby Mathis Esq. | Tax & Asset Protection
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(ethereal music)
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- [Toby Mathis] Alright, what's the advantages
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of becoming an Opportunity Zone business?
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You want to hit this?
- Go ahead instance.
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- [Toby] Or I can hit this all day long.
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This is crazy so...
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Here's the deal,
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with the Opportunity
Zone, the Tax Cutting--
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- [Both] Jobs Act.
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- [Toby] The TCJA,
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I'll just call it the Trump Tax Act.
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So is it too late to issue a 1099 or not?
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Someone just asked.
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It's not too late, but I
probably wouldn't for 2018.
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You are late you're
going to pay a penalty.
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And it depends on who it is too.
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If it's a large amount,
I would pay the penalty
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and just go ahead and do it.
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If it's a small amount,
then I probably wouldn't.
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I'll take my chances.
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What are the advantages of becoming
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an Opportunity Zone business?
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So here's how it works.
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The Tax Cutting Jobs
Act, created these areas
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where
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they need,
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basically economically disadvantage areas
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where they want people to
invest in the businesses
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and in the properties there.
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And so all states came up
with a list of the zip codes
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that were their areas,
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what they call Opportunity Zones.
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So disadvantaged areas
that need investment.
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What is good for the investor,
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is that you can defer your
capital gains, any capital gains.
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If you invest in what's called
an Opportunity Zone fund.
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So it's a LLC taxes of partnership,
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LLC taxes of corporation
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or a corporation.
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Those are your Opportunity Zone funds.
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As long as you invest
those funds within 180 days
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of the taxable event,
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so you sell some Bitcoin or you sell stock
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or you sell property and within 180 days
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of the sale, you put it in
an Opportunity Zone fund.
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And that Opportunity Zone
fund, invest 90% of it's assets
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in
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the Opportunity Zone.
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So if it has a million dollars,
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it needs to buy 900,000
of Opportunity Zone,
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property or business.
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The reason people do this is two fold.
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The number one reason is because
you're deferring that gain.
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You do not eliminate
that gain that you have.
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So let's say Jeff sells a
million dollars of Bitcoin.
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He owes, lets say it's long term,
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he's held it for over a year.
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He owes long term capital gains in 2019.
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He just sold it.
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He puts it into an Opportunity Zone fund
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that's buying Dairy Queens
in Opportunity Zones.
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I'll just use that as an
example, instead of real estate.
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I know all of you guys want
to talk about real estate,
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but this can be businesses too.
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And Almen this is going to
make sense here in a second
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of how it's different
then a 1031 exchange.
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So I put the
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money into this thing.
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My million dollars are
just million dollars,
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he doesn't pay tax on in 2019.
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He doesn't pay tax on it in 2020.
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He doesn't pay tax on it in 2021,
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22, 23, 24.
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Then comes 2026.
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He will pay tax on that money in 2026.
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But he will also get what's
called a step-up in basis
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on a portion of it.
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And that potion of it is 15%.
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So, if Jeff has that million dollars
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he would owe tax on,
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when are taxes due?
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April 15th
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of next year if he sold it this year.
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So he'd owe tax on a million bucks,
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he'd owe 20%
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on a million bucks, plus the state.
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Well we're in Nevada, so
there's no state income tax.
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So he'd owe $200,000.
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What he gets to do is he gets to not only
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does he not have to pay that $200,000
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but he gets a step down or step-up.
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He's going to not have
to pay tax on 15% of it.
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So he's going to pay tax on 850,000.
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- [Jeff] Um-hm.
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- [Toby] And let's say it's
still 20% and it's 850,000.
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He's going to pay 170,000
not the 200, in 2026.
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So that's benefit number one.
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Benefit number two is the investment.
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He put a million dollars
into an Opportunity Zone
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and let's say that million dollars
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becomes worth five million.
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So long as Jeff holds that
property for 10 years,
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so he has these Dairy Queens
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and he owns them for 10 years.
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He pays zero tax on that growth.
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So at the end of 10 years,
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Jeff sells all of his Dairy Queens.
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And he gets to keep $5
million in his pocket.
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So Jeff paid, instead of
200,000 of tax if he had
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done this without using
the Opportunity Zone,
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he would have paid 170,000.
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Plus if he had done his own money,
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he would have had to pay on all that gain,
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four million dollars worth of gain.
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He would have paid another 800,000.
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He would have paid up basically
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a million dollars taxes.
- A million dollars, yeah.
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- [Toby] He instead is paying 170,000.
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So he lowered his tax bill by $830,000
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under that scenario.
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And I just pulled that up out of my ear.
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How long can you park the
money before reinvesting?
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Somebody asked about this.
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So when you put your money into
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an Opportunity Zone fund,
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there's a testing period every six months
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or the end of the year.
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Where they dev 90% needs to be invested
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in the Opportunity Zone.
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So you literally have to
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put that money in use,
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I would say within six months.
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So I was talking about
it with Clint today,
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one of my partners.
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And we're not aware of
anything that accelerates that.
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If Jeff sells his Bitcoin,
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puts it in a fund and that
fund deploys those resources
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three months later.
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Technically Jeff could be,
nine months after the sell date
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and still be in compliance.
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How do you find those
Opportunity Zone funds?
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They're out there,
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or you make your own.
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So you can become your
own Opportunity Zone fund
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by creating your own Opportunity Zone LLC
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tax as a partnership or corp.
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And we have to do a special filing.
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I think it's 8996 that we're filing.
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And you're deferring it
with an 8949 on your 1040.
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- [Jeff] Right.
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- [Toby] See I love tax forms.
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I only know that because a Jeff,
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he knows the tax forms.
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Kent, what is required
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to move an existing business
to an Opportunity Zone?
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I don't think you can take
something that you already own
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and make it into an
Opportunity Zone property,
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unless somebody's investing in
it that's not related to you.
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Is it possible to create
an O.Z. fund for unrelated
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third party investors and
not be a broker dealer?
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Clay yes that would be
called a Reg D offering
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or private placing.
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And yeah, you don't have to
be a broker dealer to do that.
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You can get carried interest.
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You get all these good things and those,
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but you know, that's security stuff.
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And then other then self dealing issues,
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investing in Opportunity Zones
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which have an interest standard,
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because it has to be
someone else's business.
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Technically I think it has to
be somebody else's business
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but I'm just going to give you this.
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All I can tell you is
from the tax standpoint,
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this is how the rules work.
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You always want to look.
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And yeah, somebody just said,
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aye you'll get a recording of this.
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Somebody's asking.
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This is complicated stuff guys, right?
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And then somebody just asked
a really good question.
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Which is, what's the difference between
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an Opportunity Zone and a 1031 exchange?
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So a 1031 exchange is
for real estate only.
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And you have to exchange
property for more real estate.
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And when I say property, real property.
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It's real estate for more real estate.
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- [Jeff] Right.
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- [Toby] So Jeff let's say
I sell my mobile home park.
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Can I buy a commercial building?
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- [Jeff] Yes.
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- [Toby] I sell my condo,
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can I buy six single family residences?
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- You can.
- Yeah.
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What are the rules
regarding a 1031 exchange?
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- [Jeff] A 1031 exchange,
you have to identify
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your replacement properties.
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Within 45 days of selling your property.
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- [Toby] Yep.
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- [Jeff] Everything has
to go through a qualified
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intermediary, this is basically someone
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whose going to hold the
cash for you from the sale.
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The exchange of properties actually
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has to happen within 180 days.
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But it has to be one or
more of those properties
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you initially identified
in the first 45 days.
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So if you're going to
do one of these things,
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you really need to have
your ducks in a row
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before you start it.
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- [Toby] Yep, before you
do a reverse exchange,
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if you're already at a property,
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get them to acquire the property for you.
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And then sell your
property as an exchange.
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But it has to be a greater or equal value,
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to avoid the tax.
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And then your basis just goes forward.
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So the reason the
Opportunity Zone is so hot
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is because people are like
hey, I'll dump a bunch of money
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into real estate there.
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The rule on the real estate
is you have to double
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the improve value or if it's land,
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you just have to double the value.
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Meaning if you buy a
piece of land for 500,000,
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you have to invest
$500,000 in improvements.
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If you buy a piece of
property like a building
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for a million bucks, and
the land is worth 200
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and 800,000 is that building,
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you have to invest
$800,000 in that building.
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And it just has to be either
you put cash in there,
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you have 31 months.
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So if you sell your Bitcoin
for a million bucks,
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you buy a piece of property for 600,000.
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And you have 400,000
sitting there in cash.
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If you put that $400,000
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into that $600,000 dollar property,
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assuming that, let's say
the land value was 200
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and the improvement was 400,
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then you're fine as long
as you do all the rehab
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within that 31 months.
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If you can't do it,
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then a portion of it will be taxable
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back to the very beginning.
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It could actually be
pretty nasty if you don't.
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So you got to make sure
that you're picking,
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when it's real estate,
that you're doing it right.
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God I got a lot of questions on these.
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This is fun.
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(chuckles)
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This is always a kick in
the pants, these questions.
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Okay if I do a 1031 exchange,
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rental into a rental,
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and keep the new rental as a rental for
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two to four years,
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then move in and live there
for three to five years,
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can I sell it and take the home exclusion?
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I will see accumulated past
depreciation of a rental
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accounted for at this point.
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Alyssa, you ask really good questions.
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So first off,
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we have investment property
that they were going to
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make it into personal property.
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I think you have to
hold it for five years.
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Investment property to
make it a 121 exclusion.
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- [Jeff] Oh.
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- [Toby] And then you have
periods of disqualified use.
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So usually when doing the opposite,
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you have a piece of property
that you've lived in
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and owned, and you've
rented for a few years
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and then sell it.
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The rule is you have to
live in it as your primary
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residence two of the last five years,
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and then they're going to
disqualify a portion of it.
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Of the total amount of time you owned it
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for disqualified use.
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Which is what that rental is going to be.
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And so went rental, and then
became a personal residence.
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They're going to say, alright
you lived in it for five years,
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you rented it for four years.
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You're going to get 4/5
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or what ever they call that.
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Yeah that's about 4/5
whatever that ratio is,
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of the $500,000 exclusion
if you're married
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or if it's two of you, it's 250.
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And then here's the most
important thing for you to take
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away from this Alyssa.
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The 121 exclusion is
only for capital gains.
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So it will have zero effect
on your depreciation.
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Your depreciation after recapture,
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all of it, but it goes up to 25%.
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So what I usually do when I
see these types of scenarios
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is I say, if it was a rental before,
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make it a rental again
and then sell it under
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a 1031 exchange and then
you could avoid the tax too.
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Somebody says where do I find areas
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that are Opportunity Zones?
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Is there a website?
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Yes, you Google
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Opportunity Zones heat map.
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And you will find it.
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It's one of the first things that pops up.
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Can an existing property
be classified into an O.Z.?
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If it is the designation,
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I don't know what that means.
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What is needed to do that?
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You just have to be in
the Opportunity Zone,
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which is in a zip code.
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And somebody says,
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would this work for
exercising stock options?
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Yes.
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When I exerciser they
take taxes off the top
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and send me the balance.
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Would like to use the funds
for an O.Z. investment.
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What about the taxes paid upfront?
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You will get them back Todd
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because you're going to say
I'm deferring all my tax.
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Right?
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- [Jeff] I'm not sure about that,
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because it's usually a payroll
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with holding all the stock grants.
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- [Toby] Oh, well it
depends on what you're
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doing with it.
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If you're exercising a stock option,
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and then is he selling the stock?
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I guess, it would have
to be capital gains.
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So I believe you're going to work Todd,
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but it would have to be capital gain.
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- [Jeff] Yeah a lot of time with these
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stock options that you're up-sizing.
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You've been granted
options by your company,
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you're already getting a step-up in basis
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in that stock, so there's
probably not going to
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be a whole lot of capital gains there.
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- [Toby] Somebody said, let's see.
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Somebody asked a real
long, I thought it might be
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Opportunity Zone related.
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But there's lots of questions.
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- [Jeff] But yeah I notice
with these opportunities--
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- [Toby] It's payroll
withholding on capital gain.
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So as long as it's capital gains Todd,
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then you will be able to do it.
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Yeah so let's say it's
an apartment building
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in the O.Z. area, can you benefit
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from the capital gain treatment?
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Yes and if you invest in it for 10 years
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and it doubled, you
would have paid zero tax.
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You're hitting the nail on the head,
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that's what they want you to do.
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They want you to go and there's
people that are doing it.
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We have clients that are doing it,
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Morrine's a great example.
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Dumping a lot of money in
there because they know that
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these properties are
worth a ton after a while.
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Especially what some
people do is they target
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apartment buildings with bad management
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or that have lots of money
that needs to be put into them.
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So again you have to put
whatever that improved
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value is that is sitting on that land,
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you have to double it.
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- [Jeff] Yeah so you have
to be a little judicious
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about the property you're picking out.
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I like what you're saying, good ideas.
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The run down, more
historical type buildings.
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Or gold mines for something like this.
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There's just lots of opportunities here.
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And it's obvious that
this credit was designed
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or this deduction to help
these disadvantaged areas.
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- [Toby] And somebody just
said, we had the property
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and we already turned it around.
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Does it qualify?
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No, it won't qualify.
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But here is what you do.
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Now you know about it,
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you already know what you're doing,
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target another building
in that Opportunity Zone,
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pull the money out of the
existing property to invest in it.
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And then sell something with
a bunch of capital gains.
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It's all just cash,
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you're just designating ham,
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deferring the cash or the capital gains
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that they had on investment X
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for putting it into this Opportunity Zone.
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- [Jeff] Right.
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- [Toby] Doesn't matter
where you get the money,
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so I'll pull the existing
and then I would defer
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like I say, hey I have a big tax appetite,
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and I'm going to sell a bunch
of stuff that made money.
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And I'm not going to pay tax on it.
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And I'm going to put it
into another building
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in the Opportunity Zone.
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So I hope that makes sense.
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(calm electronic music)
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