The Opportunity Zone program—part of the 2017 Tax Cuts and Jobs Act—has established itself as a powerful tool for tax-advantaged wealth generation. With an estimated $150 billion of equity raised since the program’s inception, it’s clear that many market participants are recognizing the perks of OZ investing. How can advisors make sure their high net worth clients are capturing the greatest possible benefit from the OZ program?
Here we share our top five strategies for achieving the best use of OZ fund investing.
1. Consider the type of capital gains
Does the investor have eligible gains from real estate?
Investors with gains from real estate may have multiple choices for managing tax consequences, including a 1031 exchange. On the other hand, capital gains from selling stocks, ETFs, cryptocurrencies, or other securities and assets—including the sale of a business—are not typically eligible for standard 1031 exchanges. Therefore, the OZ program may be the ideal choice.
2. Think about the investment horizon
Can the investor hold the OZ investment for 10+ years?
If an investor holds their OZ fund investment for at least 10 years, then any capital gain appreciation earned from the OZ fund investment is not taxed upon disposition. This is the most significant tax benefit provided by the Opportunity Zone program. As it currently stands, the OZ program won’t sunset until 2047, giving investors with long time horizons many years to let their OZ investments grow.
3. Ensure adequate liquidity when tax on the initial capital gain comes due
Is the investor well positioned to cover the tax bill after the deferral period ends?
By investing eligible capital gains in a Qualified Opportunity Fund, investors can defer taxes from the original asset sale through December 31, 2026, or when the investment in the OZ fund is sold, whichever comes earlier. In most cases, the tax payment for the eligible gain would be due in 2027 when the taxpayer files a return. (Note: It’s possible that new legislation could extend the year-end 2026 deadline.)
4. Examine suitability for the fund’s underlying investment strategy
Is a value-add, opportunistic, or blended investment strategy appropriate for the investor?
The IRS requires Qualified Opportunity Funds to pursue heavy renovations, adaptive reuse, or ground-up construction—all of which are considered value-add or opportunistic real estate investing strategies. These are generally deemed the riskiest categories of real estate investing, but they also offer the highest upside potential and highest rate of targeted return. Many Qualified Opportunity Fund sponsors (including Caliber) combine a value-add or opportunistic strategy with a more conservative, “core”-like level of debt by borrowing 50% or less against the value of the assets. These funds combine the lowest level of debt risk with the highest level of execution risk, creating a blended rate of return that offers investors an attractive upside without putting their capital at a high level of risk.
Let’s consider an example: One common hybrid opportunity zone strategy is known as “development to core.” The sponsor builds an asset from scratch, stabilizes the property, then holds it for cash flow—all within the same Qualified Opportunity Fund. This strategy is intended to deliver significant appreciation in the first three to five years, then become a consistent income-producing investment in its final few years.
5. Make the right choice between an active or passive OZ investment
Should the investor be a GP or LP?
In general, investors have two ways to participate in the OZ program:
- Active – Investors with eligible capital gains who wish to take a hands-on approach can create and manage their own Qualified Opportunity Fund(s) and act as the general partner (GP).
- Passive – Investors who prefer to be hands-off can invest their eligible gains as a limited partner (LP) in a fund managed by a third party.
The decision between active and passive is also driven by the amount of eligible gains to invest, as the GP option is typically most appropriate for larger amounts of gains.
Many savvy investors have created their own personal Qualified Opportunity Funds, only to find themselves nearing the 30-month deadline for reinvestment without the expertise to manage commercial real estate. With Caliber’s QOF Roll-up Program, investors can merge their personal OZ fund with Caliber. Caliber can step in and leverage its 15 years of experience finding, evaluating, and managing commercial real estate.
Contact our Capital Markets Team below or visit our website to learn more about Caliber’s Opportunity Zone offerings, including our QOF Roll-Up Program, Opportunity Zone funds, and single asset investments.
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About Caliber (CaliberCos Inc.) (NASDAQ: CWD)
With more than $2.9 billion of managed assets, including estimated costs to complete assets under development, Caliber’s 15-year track record of managing and developing real estate is built on a singular goal: make money in all market conditions. Our growth is fueled by our performance and our competitive advantage: we invest in projects, strategies, and geographies that global real estate institutions do not. Integral to our competitive advantage is our in-house shared services group, which offers Caliber greater control over our real estate and visibility to future investment opportunities. There are multiple ways to participate in Caliber’s success: invest in Nasdaq-listed CaliberCos Inc. and/or invest directly in our Private Funds.
Investor Considerations
The information contained herein is general in nature and is not intended, and should not be construed, as accounting, financial, investment, legal, or tax advice, or opinion, in each instance provided by Caliber or any of its affiliates, agents, or representatives. The reader is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances, desires, needs, and requires consideration of all applicable facts and circumstances. The reader understands and acknowledges that, prior to taking any action relating to this material, the reader (i) has been encouraged to rely upon the advice of the reader’s accounting, financial, investment, legal, and tax advisers with respect to the accounting, financial, investment, legal, tax, and other considerations relating to this material, (ii) is not relying upon Caliber or any of its affiliates, agents, employees, managers, members, or representatives for accounting, financial, investment, legal, tax, or business advice, and (iii) has sought independent accounting, financial, investment, legal, tax, and business advice relating to this material. Caliber, and each of its affiliates, agents, employees, managers, members, and representatives assumes no obligation to inform the reader of any change in the law or other factors that could affect the information contained herein.
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