Thread by @DallasAptGP

Here is an OZ strategy that I have been brainstorming which I think displays the power of the program.

This is advanced stuff but do it right and there may be a LOT of tax avoided.

I am not a CPA or Tax Attorney. Do your own research!!

Step 1: Start an OZ Fund

This can sound daunting but an OZ fund is an LLC with special language in the operating agreement and IRS guidelines that CPA and tax attorney can help to navigate

Step 2: Get money into your OZ Fund

The 1st IRS guideline is that “eligible gains” need to be the initial capital for the OZ Fund. In a unique quirk…this can be a tiny amount of money ($10?). The rest could come from “non-eligible” funds and be papered as a loan to the OZ fund

Step 3: Find land or a distressed asset in designated OZ and build new or substantially improve

This is a high-level skill that not everyone has. There are partners like @DonovanBuilds and @TyronMcDaniel doing awesome deals in Houston OZ

https://twitter.com/DonovanBuilds/status/1480536570751033346?s=20

Step 4: Cost Seg and Bonus Depreciate

@sweatystartup wrote a great thread on these benefits. I will add that if interest in OZ Fund is held for 10+ years then depreciation will not have to be recaptured

Key point: No recapture in OZ

https://twitter.com/sweatystartup/status/1334659691738173440?s=20

Step 5: Refinance

There has likely been value creation through either new construction or heavy renovation. Once the property is leased up it is time to refinance into long term fixed rate debt and pull cash out. This is a long term hold

Recap
If plan stops here it would have been a very tax efficient way to invest in real estate
•Money invested
•Got money back in a refi
•Created mailbox money
•Generated depreciation loss without recapture
•No cap gains on the OZ asset at sale with 10+ year hold

Step 6: Use refi proceeds to do it again

Find another site/building where the numbers make sense and get to work.

Step 7: Cost Seg and Bonus Depreciate Again

100% Bonus Depreciation will be phased out after 2022 but combined with Cost Segregation still has lots of power

•80% for property placed in service 2023
•60% for 2024
•40% for 2025
•20% for 2026

Step 8: Refi and let it cashflow

Step 9: Repeat steps 6 through 8 as many times as possible until 12/31/2028. Unless there is new legislation, no new OZ acquisitions can be made after this date.

The final time you do this you'll end up with money back in your pocket

Step 10: Everything can be sold 10 years after the OZ Fund was formed and the tax basis can be stepped up to market value. Capital Gains taxes will not be owed on sale and depreciation will not need to be recaptured.

A good investor or operator will likely be able to create 6x the initial OZ investment in depreciation losses. Even at 6x, anyone above a 20% tax rate is getting real tax benefit here.

I ran numbers based on doing a ground up construction duplex like @DonovanBuilds posted yesterday. Guessing that total cost was $500k (1800sf total) and it took $150k equity.

He refinanced all equity out in 13 months and is now cashflowing $700/mo after PITI and expenses

Doing 5 duplexes before 2028 in OZ structure (one every 18 months) would very roughly create $700,000 in depreciation losses. The value of these losses depends on what tax bracket an investor is in.

Rough math: Using a 30% tax bracket for analysis, $700/month income from 5 duplexes, and principal paydown on a 4% rate 30-year am loan then you have a 30% IRR

This is if you sell the properties in year 10 for the mortgage balance!

If you make money at the time of sale (which is certainly the goal) then you have a tax free windfall.

You can do this by investing in lots of property types or by putting QOF funds to work in multiple QOZB deals (like investing as an LP).

The program is extremely powerful but is most powerful if there is a captive QOF and the money keeps working

Adding to this train of thought. 2 big levers that amplify the tax benefits but also changes the risk profile (not insignificantly)

#1 - Do more deals by decreasing time between acquisition and cashout refi
#2 - Max out loan proceeds and always do the biggest possible deal