Opportunity Zones Update – Defer, Reduce, and Even Eliminate Taxes

Everybody is talking about Opportunity Zones … and they should be. They can be a great opportunity (just like the name says)!

But many investors have found themselves scratching their heads. How exactly does someone take full advantage of Opportunity Zones?

Recently released guidelines are giving investors and syndicators much needed clarity for moving forward … and making the most of their Opportunity Zone investments.

We sat down with attorney Mauricio Rauld to discuss how Opportunity Zones can help investors like you defer, reduce, or even completely eliminate capital gains taxes.

In this episode of The Real Estate Guys™ show, hear from:

  • Your zoned-in host, Robert Helms
  • His zoned-out co-host, Russell Gray
  • The “Anti Lawyer” attorney, Mauricio Rauld

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Zoning in on Opportunity Zones

The wait is finally over.

The rules for investing in Opportunity Zones … and the potential tax breaks that come from it … are out.

In case you haven’t heard, Opportunity Zones are basically a capitalist version of wealth redistribution. They provide tax incentives to get rich people to voluntarily put their money where the government wants it to be.

Opportunity Zones exist in every state and in Puerto Rico. These areas tend to be blighted with some issues … they need some gentrification.

Each governor in the United States was taxed with the job of figuring out what areas in their states needed the most help … and where private enterprise could step up, do the work, and get benefits.

We’re not legal experts … but we know someone who is.

Mauricio Rauld is known around here as the “Anti Lawyer” … but he is actually a practicing lawyer who helps people primarily with syndications.

Since we first learned about Opportunity Zones last year, Mauricio has spent his time discovering the good, the bad, and the ugly sides of these types of investments.

The good side of Opportunity Zones

Let’s start with the good.

Opportunity Zones offer huge tax benefits … four in particular.

The first is that you get to defer the tax from whatever capital gains you’re investment is coming out of.

For example, if you have a piece of real estate … or any other asset, like precious metals, stocks, bonds, even your collectible car … you can take those gains and reinvest within 180 days into a qualified Opportunity Zone fund and defer the tax.

You aren’t deferring the tax indefinitely like a 1031 … but you will get to defer for at least the next seven years … until December 31, 2026.

The second benefit is that if you hold onto your new investment for a period of five years, you get a 10 percent discount on the capital gains you would have paid on the original investment.

Benefit number three kicks in if you hold onto your investment for seven years. Now, you’ll qualify for a 15 percent discount on your capital gains.

The biggest benefit of all … number four on our list … applies after holding your asset for a decade. After 10 years or more, the entire gain from your investment is tax free.

It’s all about taking an appreciated asset, putting it into an Opportunity Zone fund, and not paying taxes right away. The longer you wait … the less tax you pay.

One important thing to highlight once again is that the money you place into these Opportunity Zones doesn’t have to be in real estate to begin with.

A lot of the money we foresee coming into Opportunity Zones hasn’t historically been in real estate. They’re in other types of investments where there are big gains to be paid … like the stock market or precious metals.

As always, talk to your tax professional before making any decisions … but if you are sitting on a big tax gain, Opportunity Zones could be an attractive option.

Another positive … there is very little government interference and regulation on this project.

It’s a self-certification … meaning that whoever is putting together the fund simply checks a box on the first year tax returns to certify that it qualifies as an Opportunity Zone.

During your holding period, the government will check with you every so often to ensure you comply with program … but it won’t be dealing with the SCC or going through an approval and registration process.

The bad side of Opportunity Zones

There are some downsides … the bad … of getting into Opportunity Zones … and really it isn’t so much “bad” as it is things to consider fully before diving in.

The first is a rush for time.

In order to fully gain the benefits … to get seven years under your belt before December 31, 2026 … you need to make the investment before the end of 2019.

That means you will need to liquidate your asset and invest in a fund pretty quickly to get the 15 percent discount.

If you don’t make that deadline, you can always go for the 10 percent … and either way you should want to hold the investment for 10 years or more to make it tax free. If that’s your plan, there is less of a rush.

The other important consideration is the substantial improvement requirement.

This requirement means that if you buy a price of property you must put the same amount of money that you purchased the property for into renovations. The government wants you to improve the property.

This requirement only applies to vertical construction … meaning the buildings, not the land.

So, if you buy a property for $1 million and 20 percent of that is in the land with 80 percent in the building … then you only need to invest $800,000 in improvements.

There are a few exceptions to this rule. If you purchase a piece of property that has been vacant for the last five years … the substantial improvement requirement doesn’t apply.

Remember, the whole idea behind Opportunity Zones is for folks to put private capital to work in revitalizing these areas.

The other important requirement for your property to qualify is that it must involve an active trade or business. This is still a bit of a gray area … but we expect more guidance from the Treasury Department soon.

The ugly side of Opportunity Zones

Mauricio says that when it comes to “the ugly” of Opportunity Zones … a lot of personal opinion comes into play.

Much of the work Mauricio does is with syndicators, and there are pros and cons for them in this type of investment

Syndicators can promote Opportunity Zones as a great chance for investors because of the extensive tax benefits.

But syndicators themselves don’t get the tax benefit for the carried interest.

If this is a traditional syndication, the syndicator will get a cut for sweat equity … let’s say 20 percent.

The investors get 80 percent AND all the tax benefits … but the syndicator will have to pay taxes on the 20 percent they made. They can’t defer that.

This could be ugly … because as a passive investor you want an incentive for your syndicator who is running the project to be excited about the deal.

But on the other hand, most syndicators aren’t going after these deals for tax benefits for themselves. Instead they see them as an opportunity to court capital from a completely new and different source.

Someone who has been in the stock market or private equity or in precious metals that has avoided selling because they didn’t want to pay tax can now work with syndicators in real estate and find a win-win situation.

Another ugly truth … you can’t get into Opportunity Zones alone.

You have to put together a fund … some kind of entity. It doesn’t have to be a syndication … but it has to be a partnership. You need at least two people to get started.

Mauricio also cautions investors to be aware of artificial demand.

Opportunity Zones are designed so that people are investing in areas that they wouldn’t have originally invested in. You’ve got to make sure the investment still stands on its own merits.

Because it is an artificial demand, you could be potentially overpaying for the property in the long run. At some point you could be paying so much more that the tax benefits may not make sense.

Talk to an expert

Think Opportunity Zones might be the right opportunity for you? Talk to your tax professional.

At the end of the day, it’s a tax matter. There are forms to check and rules to follow. You want a tax expert to keep you on track.

And you’ll need an attorney to help you put together a fund, make sure it is structured properly, and ensure the investment itself is eligible.

There are no guarantees in investing … but doing your due diligence gives you the best chance at success.


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10/3/10: Caveats and Considerations of Cross-Border Real Estate Investing with Attorney Mauricio Rauld

“Go West, Young Man!” has given way to “Go Global, People!”

Back in the fledgling days of the American experience, young opportunity seekers often left the comfort and competition of the mature eastern states to seek their fortune in the emerging markets of the wild, wild West.  Real estate was a big part of the opportunity then – and it’s a big part of the opportunity today.

In the covered wagon, trekking through radio no man’s land in search of real estate fortune:

  • Global real estate pioneer and show host, Robert Helms
  • Wagon maker, puller and repairman, Russell Gray
  • Attorney Mauricio Rauld

Today’s investors, both stock and real estate, have a growing attraction to foreign markets. And not just developing markets, but thanks to currency fluctuations and an ever more global economy, investors are seeking to take advantage of shifting tides of capital, business and jobs into mature foreign markets as well.

So while there are many opportunities available around the globe, being an investor today requires more sophistication and attention than ever before.  Some are happy to simply work hard, live below their means, save money and turn it over to Wall Street and the government to provide for their future.

Others have decided to take control of their financial future and invest the time, money and effort to find investments they can understand and manage themselves.  For people like this, God created real estate.

But before you get dollar signs in your eyes and charge off to buy cheap, beautiful property in warm, affordable, tax favorable markets (which is SOOOO tempting), it’s smart to get some guidance from people who’ve gone before.  Remember, pioneers are the guys who get arrows in their chests while they discover new opportunity.  Settlers are the folks who learn from the pioneers and come in and develop the opportunity.

So, with that verbose prelude, this episode of The Real Estate Guys™ Radio Show features an interview with an attorney who serves as general counsel to an international real estate investor and developer.  His job is to help his client avoid the arrows – and to extract them when one strikes.

Listen in and discover what things YOU should be thinking about as your take your real estate investing across the border.

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Note:  Attorney Mauricio Rauld will be one our esteemed faculty members for our 9th annual Investor Summit at Sea

11/1/09: When Partnerships Go Awry – Lessons from the Trenches with Attorney Jeff Lerman

Like marriages, partnerships can be beautiful or disastrous.  On this broadcast, The Real Estate Guys talks to a practicing attorney who says there are things you can do to prevent problems before it’s too late!

Your counselors for this episode:

  • Host, Robert Helms
  • Co-Host Russell Gray
  • Attorney Jeff Lerman

The parallels between marriage and partnerships are many, including the statistic that most break-ups are caused by financial pressures.  With so many properties down in value and funding for projects nearly impossible to come by, many partnerships are in trouble.  But in the midst of the carnage, are there lessons to be learned?  After seeing many promising partnerships hit the skids, Attorney Jeff Lerman shares his front line experiences with The Real Estate Guys.

Jeff reveals the #1 mistake most partners make and tells us exactly how to avoid it.  Like many things in life, the right things are easy to do, but they’re also easy not to do.  Unfortunately, the price of neglect can be very high.

Jeff also shares his #1 tip for working through challenging times with your partner(s).  Some issues can be avoided.  Others simply have to be dealt with.  Jeff describes what he calls “the most important factor” in diffusing partnership tensions.  He also shares several of the red flags he looks for in order to avoid getting into a problem partnership in the first place.

This show is a follow up to Halloween Horror Stories and stayed with the theme that it is far more efficient to learn from other people’s mistakes instead of your own.  Jeff Lerman has seen it all.  Listen in as he gives you the inside scoop on the lessons his clients paid hundreds of thousands of dollars to learn!

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The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources that help real estate investors succeed.