Thread by @baldridgecpa

It is time Keith! This is a thread I have been meaning to write for a while, and one of the great 'opportunities' for exemption of tax out there.

Pardon my dad joke, and get ready for a Thread⬇️

https://twitter.com/Keith_Wasserman/status/1335658736254271488

QOZ, or OZ, QOF, Qualified Opportunity Zones/Funds.

Whatever you call them they were established with the Tax Cuts and Jobs Act of 2017, and they are a great strategy to defer and reduce taxes.

The Act presents one of the few chances in the tax code to receive an exemption, which is probably the Holy Grail of all tax - Take gains and never pay tax on them ever.

All of this while allowing you to roll your investment dollars into a very tax efficient vehicle - SMB or RE

As part of the TCJA, congress provided a break for people to invest in a "Qualified Opportunity Zone". These are set, generally low income, areas that are designated at the state level.

See a link to the QOZ map below:

opportunityzones.hud.gov/resources/map

The deal in a nutshell:

1. Take capital gains from the sale of a capital asset or exit event.
2. Defer the capital gain until 2026, and receive up to a 10% reduction by holding for 5 years.
3. If you hold for 10 years, elect a step up in basis and sell tax free until 2047!

Expanded -

Similar to a 1031 exchange, the principle of a QOF is deferral of gains into another asset, but there are several differences:

a. The deferred gain can be any capital asset, not just real property. It can be sale of stock, a company, property, art, etc.

b. You are able to pull your basis out, and only invest the gain into the QOZ, in any amount you would like to defer. This is important because of c.

c. In 2026 the deferred gains come do. If you held for 5 years (invested by 12/31/21) you will receive a 10% reduction in gain...

... If you held for 7 years (you made your investment in a QOF by 12/31/19) you will receive an additional 5% reduction, for a 15% total.

You will need to have the cash to pay the capital gains tax deferred at that point in time.

d. A QOF doesn't have to buy Real Estate, it can also buy or invest in an SMB (a QOZB). The assets do not need to satisfy the "like kind" requirement.

e. Substantial improvement and investment must be done to the asset purchased, which is why many folks opt for new development.

f. Finally - the opportunity to elect a step up in basis and exempt any further gain on your investment if it is held for 10 years. Note this is an election, so if the investment goes down in value you would still have the basis to take the loss.

g. Similar to a 1031, you have 180 days to invest in a QOF, then there are regulations as to timing the QOF to deploy the cash and what it may purchase.

Unlike a 1031, you do not have to keep your gains with a qualified intermediary, and you do not have to invest all the gains.

This is great for anyone with a built in capital gain that also wants to invest in a QOZ.

You know I hate tax driven investments..

Ideally you -
1. Have an investment you love.
2. Learn it is in a QOZ
3. Have a large CG, and the potential tax burden is keeping you in the deal.

A QOF can be as simple as a partnership between spouses (or you and a GP entity) that elects through Form 8996, or as complex as a multi billion dollar fund (they are out there).

You can sell some stock and go buy and fix up a rent house, or invest w a syndicator in a building.

THE PITFALLS
1. The liability that the operator does not manage the QOF correctly. These contracts should be written that this burden falls back on the operator, and they usually are

2. That you buy a deal that is overpriced or you don't like just to save tax. Don't do that!

3. You don't plan to pay your deferred taxes in 2026. Don't do that either..

4. Like any deal, that by the time you jump through hoops and hurdles to meet the requirements, the deal is not as attractive.

This is a somewhat high level overview on the subject, on which a small textbook could probably be written. @MichaelKitces has an excellent article on the subject for some deeper reading.

kitces.com/blog/qualified…