Caliber owns 1/3 of downtown Mesa, Ariz., an opportunity zone 
A rendering of Caliber’s Tucson Convention Center Hotel, an opportunity zone project 
Phoenix Medical Psychiatric Hospital, an opportunity zone project by Caliber 
Caliber’s recently completed opportunity zone projects include The Roosevelt Luxury Townhomes in Tempe, Ariz.
Many of you have probably heard of the Opportunity Zone program over the past few years. Created in 2017 under the Tax Cuts and Jobs Act, these federally designated U.S. census tracts offer capital gains advantages to investors as a way to encourage new businesses, housing, and jobs in areas that need development and sometimes lack access to capital.
Join Chris Loeffler, Caliber CEO, as he shares Caliber’s journey from a small startup to a market leader in commercial real estate asset management and gives key insights on Caliber’s innovative investment approach, including self-directed IRAs and private loans.
There are various approaches utilized by Caliber, such as converting commercial spaces, investing in distressed real estate, and introducing pickleball facilities. In this podcast, Chris discusses the importance and intricacies of approaching opportunity, building investor trust, securing funding, transitioning to the public domain, and maximizing returns within Opportunity Zones.
Stock traders’ newly discovered
Tax haven
Opportunity Zone Funds offer a new investment option to invest short- or long-term capital gains from the sales of commonly held investments like stocks, a business, or real estate assets. If the sale produces a capital gain, the investor can place the capital gain portion into an Opportunity Zone fund.
A key feature is that stock traders, for instance, can invest their gross capital gains for the year and utilize trading losses for other tax purposes.
Assuming an investor compares an Opportunity Zone investment earning 8% annual growth per year to a non-Opportunity Zone investment also earning 8% annual growth per year, the investor may earn in tax savings approximately two times the total taxes they will eventually pay on their original capital gain. These savings are on top of investment returns that they earn, and the savings are accomplished through three distinct tax benefits offered by the Opportunity Zone program.
Opportunity Zone Program Benefits
1. Tax deferral
The capital gains tax from the original sale may be deferred through December 31, 2026, or when the investment in the Opportunity Zone Fund is sold, whichever is earlier.
2. Elimination of capital gains tax
Additionally, if the investor holds the Opportunity Zone Fund investment for at least 10 years, any capital gain appreciation earned from the Opportunity Zone Fund investment is not taxed upon disposition. This is the most significant tax benefit provided by Opportunity Zones.
Opportunity Zone Transactions:
Example Scenarios
Let’s walk through examples involving the sales of stock, a business, and real estate. These apply, whether you sell these items personally or jointly through a partnership, S corporation, or other flow-through interest on a K-1.
Example 1: Sale of a stock
An investor bought $10,000 worth of stock in 2015. In 2020, it was worth $100,000 and they decided to sell it.
$100,000 – Proceeds from the Sale of Stock
$(10,000) – Less Basis of Stock
$90,000 – Long-Term Capital Gain
The investor keeps the original $10,000 investment in the stock, as this is a return of capital and he or she can utilize that cash as they please without paying tax. A maximum of $90,000 can be invested in a Qualified Opportunity Zone Fund, earning the tax benefits we just described.
If the investor also had $50,000 that year in trading losses from sales of other stock, those losses can be utilized to offset other gains in the investor’s portfolio, as well.
Example 2: Sale of a Business
A business sale usually produces ordinary and capital gains. The ordinary gain will come from the sale of accounts receivable, inventory and depreciable assets. The capital gain will come from the sale of non-depreciable assets and goodwill. For example, a businessperson started their business in 1990 and decided to sell it in 2020. They calculate that their basis in the company is $2.5 million and they sell the business for $6 million.
$6,000,000 – Proceeds from the Sale of Business
$(2,500,000) – Less Basis of Business
$3,500,000 – Long-Term Total Gain
This produces a $3.5 million total gain, but it needs to be allocated between ordinary and capital gains for Opportunity Zone investment purposes. It is determined that there is a $2 million ordinary gain.
$3,500,000 – Long-Term Total Gain
$(2,000,000) – Less Ordinary Gain
$1,500,000 – Long-Term Capital Gain
The businessperson can invest the $1.5 million into an Opportunity Zone Fund and defer the taxes due. He or she will then keep the $2.5 million basis and have to pay taxes on the $2 million at ordinary tax rates.
This is a critical feature of this program, as it allows the basis to be separated from the capital gain, giving the seller access to cash and not requiring the seller to keep their funds illiquid just to obtain tax benefits, as they sometimes do in charitable trusts and other tax strategies.
Example 3: Real Estate Sale
An investor purchases a rental property in 2010 for $200,000. Over the years, they invest another $50,000 in improvements before they sell the property for $500,000 in 2020. They also took $60,000 of depreciation on the building.
$500,000 – Proceeds from the Sale of Real Estate
$60,000 – Add Building Depreciation
$(250,000) – Less Basis of Real Estate
$310,000 – Long-Term Capital Gain
The $310,000 would be a Section 1231 gain, which is a type of capital gain. The investor also has a $200,000 Section 1231 loss from another property sale in 2020. The investor does not have to net the Section 1231 gains and losses together and can invest the full $310,000 Section 1231 gain into an Opportunity Zone Fund.
The key takeaway—investors only need to invest the gross capital gains for the year into an Opportunity Zone Fund—they do not have to include net capital losses.
Again, unlike a 1031 exchange, which would require this investor to roll forward their entire $500,000 investment into a new real estate project without giving the investor access to any cash, an Opportunity Zone investment allows the basis to be separated from the gain.
If you have capital gains from the sale of an asset, and your Opportunity Zone deadline was December 31, 2020, the IRS has granted an extension until March 31, 2021.
Contact us to learn more about our four Opportunity Zone projects in Arizona and how you can defer and save on capital gains taxes.
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.
