Thread by @DallasAptGP

Opportunity Zones are great tax enhancement tool for BRRRR deals

Tax deferral until 2026. Tax reduction of 10%? No capital gains!?!

THREAD BELOW explaining the tax benefits and how to do an OZ deal
1/15

I have done a big/complex OZ deal where I raised money from outside investors but I am not a CPA or attorney. I leaned on them heavily and paid them well.

If you do one then you need to consult a CPA and attorney. There is no hack to avoid that with these deals
2/15

If you have sold something (almost anything) in the past 6 months then you likely have a capital gain. All markets have been on fire. Crypto, NFT, RE, Stock, etc.

Unless you do some planning, you are going to owe taxes on that gain in April 2022
3/15

OZ Investing has 3 big benefits and the first 2 play in here. By investing in an OZ Fund you get:

1. To defer paying your taxes (on the amount of gain invested in the OZF) until 12/31/2026

2. To step up basis on that amount by 10% if you stay invested for 5 years
4/15

First 2 big tax benefits in plain language are the deferral and the reduction of taxes owed.

You no longer owe taxes in April 2022 from flipping your "Bromato" NFT. Now you can wait until December 2026 AND you get a discount.
5/15

**Quick caveat here**

After 12/31/2021 the deferral will remain in place but the "discount" will go away
6/15

The 3rd tax benefit is my favorite.

After 10 years and again after 20 years you get to step up your tax basis.

People commonly say there is no capital gains tax due on sale...but it also means you don't have to recapture depreciation!!!
7/15

All of these tax benefits have value. Even for a smaller investor.

The smaller investor has to decide if the costs of setting up their own OZ Fund and checking in with their CPA quarterly to maintain compliance is worth it
8/15

Now you understand the tax benefits of OZ investing. How do you do a deal?

1. Create an OZ Fund
2. Buy property in 1 of 8,500+ Opportunity Zones
3. "Substantially Improve" the property
9/15

Creating an OZ Fund sounds daunting but is pretty easy and is best done by attorney and CPA.

LLC is most common with specific language relating to OZ rules.

You need to "self-certify" with the IRS that this is an OZF using IRS form 8996
10/15

OZ's are not always where/what you think. They were Low-income & Low-income adjacent census tracts in 2018. This was a politically motivated process in 2018. Plus, a lot has changed in 3 years.

Learn the map in whatever city/town/rural area you already are investing in
11/15

Once you have bought a deal then you have to "substantially improve" it. This is a technical term and you need to rely on your CPA again for advice.
12/15

Basic example of "substantial improvement for OZ purposes:

PP: $1,000,000
Land Value: $300k
Bldg: $700k

Need to spend $700k on improvements. This can include interest carry, legal/CPA cost, and all other CapEx
13/15

Obviously this is best suited for very heavy value add deals (or new development).

If you use the BRRRR method then after you refinance you can redeploy funds from your OZF into more OZ deals which will also get benefit #3 (10 yr step up)
14/15

You do need to make sure that you plan so that you either have the personal cash or distributable cash in the fund to pay your taxes in December 2026.

There are a lot more rules that I didn't cover. Don't do this without CPA/Legal advice
15/15