Qualified Opportunity Zones (QOZs) have been at or close to the top of the most interesting and topical conversation list for a while now.
Many predicted that amidst all of the proposed tax legislation changes under the new administration, OZs would have their benefits extended. This did not happen but OZs remain a very compelling investment proposition. There is now new legislation in process that would extend some of these benefits.
The History of QOZs
Qualified Opportunity Zones were introduced in the Tax Cuts and Jobs Act of 2017, offering tax relief to encourage investment in areas requiring stimulus. In 2018 there were some 8700 census tracts deemed as OZs.
If a capital gain was invested into an OZ investment and certain parameters were met, a number of tax incentives were offered:
- 15% reduction if invested by end of 2019, through a stepped-up basis
- 10% reduction if invested by end of 2021
- Deferral of payment of tax on gains to end of 2026
- If the investment is held for 10 years or more, the growth from within the OZ investment is tax-free
For a client, these incentives are very compelling. It is not just the tax-free growth but the growth on the gross amount until the end of 2026 – rather than the amount net of what would have been paid to the IRS.
Having some options for OZ investments for clients is not a “nice to have” but a “need to have”! There are a number of reasons advisors must have some options available to clients in the OZ category:
- If competitors have these solutions and you do not, you are at a serious disadvantage
- Clients are much savvier nowadays and will demand this kind of product
- Structures such as OZs and DSTs can help in attracting larger and more sophisticated clients
- This has the potential to bring more assets under your management
- This is a true example of a solution matching a real need
The New Proposed QOZ Law Extension Explained
Last year, the Opportunity Zones Transparency and Improvement Act was proposed and co-sponsored by Cory Booker, amongst others. Some of the provisions are as follows:
- Extending the tax deferral for 2 years to 2028
- Expanding reporting requirements
- Permitting fund of funds structures
- Potential for recategorization of some areas – removal and addition of QOZ status
For registered investment advisors (RIAs), the extension of the tax deferral date is huge, allowing another 2 years of gross amount growth within the fund, the growth is then also tax-free, a compound benefit.
Additionally, an expanded reporting requirement is always welcome on the client side. It helps us all with our due diligence and deterring bad actors in a crowded space.
Opportunity Zones must be in an advisor’s client offering. We are all watching with keen interest to see how the proposed legislation progresses. Opportunity Zones remain a very compelling proposition in tax planning and a sponsor who focuses on investment in areas in need of development will always warrant my consideration.
Accepting investments now:
Watch: Caliber Opportunistic Growth Fund III
Watch: Caliber Qualified Opportunity Zone Fund II
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About Caliber
Caliber is a leading vertically integrated asset management firm whose primary goal is to enhance the wealth of investors seeking to make investments in middle-market assets. We strive to build wealth for our investor clients by creating, managing and servicing proprietary products, including middle-market investment funds, private syndications, and direct investments. Our funds include investment vehicles focused primarily on real estate, private equity, and debt facilities. We market our services through direct sales to private investors, wholesaling to investment advisers, direct sales to family offices and institutions, and in-house client services. Caliber’s middle-market specialty allows the Company to compete with agility and speed in an evolving arena of alternative investments. Additional information can be found at Caliberco.com and CaliberFunds.co.
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If you would like to speak to someone about diversifying your retirement accounts, contact us at [email protected] or call (480) 295-7600 to schedule a call with a member of our Wealth Development Team.
If you would like to learn more about Opportunity Zone Investing, Caliber has put together a special guide that cuts through the myths and misconceptions and outlines the benefits, the risks, and the upcoming deadlines you must know to be able to participate. Get access to the guide here.
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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