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This week’s note has lots of important information.  I suggest taking the time to get through the write-up on Opportunity Zones at a minimum.  

This was an interesting week.  You will notice in the graph below that the 10-year yield broke through its resistance line at about 2.5%.  There was a lot of news that influenced this breakthrough.  In the articles below you will find several articles discussing the German Bund dropping below 0%, the FED deciding to not do any more rate increases this year, and the FED deciding to reduce the pace of selling off its bond holdings.

Clearly, there is fear that we are moving toward a recession.  The moves by the FED indicate that they are trying to have the recession be a relatively soft landing.  The stock market drop on Friday just confirms the fears.

Understanding Opportunity Zone Investments – Things You Need to Know

What They Are:

From Google: “The Opportunity Zones incentive is a new community investment tool established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide.”

Essentially, Opportunity Zones (OZ) were created to spur investment throughout the US.  Note that there are a lot of rules regarding these investments, but the benefits are quite appealing.  These benefits are creating financial options that just have not existed for many investors.  In turn, this is creating flexibility that needs to be understood.

How might someone benefit from an OZ Investment?  

The tax incentives provided allow significant benefits/flexibility to investors who have been reluctant to take a capital gain (due to the perceived pain of the taxes owed).  This is probably best addressed with a couple of examples.  Note that any capital gain realized can utilize this option.  This could be from the sale of a business, a property, stocks, options, etc.

Example 1 – A High New Worth Investor in Silicon Valley who Is Over-Weighted in their own Company Stock and/or Options  

For many fortunate executives in Silicon Valley, much of their wealth is tied up in their respective companies.  They feel they are vulnerable to a recession; and they wish they could diversify some of their company holdings, but they do not want to face the capital gains taxes that would be due.

A qualified OZ investment allows the investor to sell off their stock/options without paying their capital gains taxes until the end of 2026.  Let me show you the benefits.

Assume that an investor has a potential capital gain of $1,000,000.

They follow the rules, fill out the forms, etc. and they invest in a qualified investment or fund.

  • The investment will have been held for 7 years by 12/31/2026. The $1,000,000 is invested in a development project.  The original capital gains tax will need to be paid in 2027.  However, they will be discounted by 15%.
  • After the project is built, there should be ongoing growth and some income should be distributed to the investor.  Note that some or all of this may be sheltered depending on the structure of the investment.
  • For this example, the $1,000,000 grows to $3,000,000 (or $2 or $4,00,000 as no one knows the exact growth) after 10 years upon the sale of the property.
  • On a Federal level, the $2,000,000 of growth is realized without any capital gains taxes (the California state benefit has not as of yet been approved).  This tax-free growth after 10 years allows the investor to do with the funds as they see fit at the completion of the project.

Summarizing this example, the investor was able to sell some company holdings, defer the taxes and get a discount on the taxes paid 7 years down the road, and then benefit by TAX FREE growth.  These benefits are why the OZ investments are so important to understand.

Example 2 – Investors who want to get off the 1031 exchange “merry go round.”  Investor Owns an Investment Property and Wishes they Could Sell and Gain Access to Their Equity

  • Instead of being locked into their current property, investors can opt to sell, take their tax-free proceeds, and then invest some or all of their capital gains.
    • This allows flexibility should an investor fear that the 1031 exchange provision may be taken away in the future.
    • The investor may not be happy with the investment they are currently in; and they want potentially better returns.
    • The investor likes the idea of being able to get to the equity they have built up over the years.  The tax-free benefit in the OZ investment allows the investor to do whatever they desire with their proceeds after the 10+ years in the OZ investment (upon the liquidation of the qualified project or projects).
The numbers here look quite similar to the numbers above.  However, this investor can pocket whatever funds are generated from the sale of their investment property that are not subject to capital gains taxes.  The highlighted benefits above still occur.

For this week’s e-blast, I want to stop this education piece at this point.  Opportunity Zones have created a large opportunity for investors.  There is a lot to understand, but I wanted to begin to expose my connections to the basics.  I suspect many will need to go much deeper, but this is a start.

Once investors determine this is something they should explore, then they will need assistance as to what is next.  If there is a strong response to this information, then I will provide more information to continue filling in the blanks.

Opportunity Zones and Disclaimer

Opportunity Zone (OZ) Investments are in the news constantly now.  There are significant tax benefits to investors; and there are programs and funds cropping up everywhere.  All of my views should be verified with tax and legal advisers as is warranted.  Clearly, I am not a CPA nor am I an attorney.

That’s it for this week.  As always, feel free to give me a call with any of your strategic financing needs.

SCCAOR’s Free Commercial Referral Networking Event:

Networking, Panel Discussion and Breakfast.  For more details, click here.

March 29 @ 9:30 am – 11:30 am
1651 North First Street, San Jose, CA 95112

Articles of Interest:

Bloomberg shared “The Stock and Bond Markets Can’t Both Be Right.”

Bloomberg also reported “Powell Signals Prolonged Fed Pause as Inflation Lags, Risks Loom.”

Reuters reported “Wall Street tumbles on global economic slowdown fears.”

The SJ Mercury News shared “Is the Bay Area pushing people to the breaking point?

The SJ Mercury News also shared “Boom! Bay Area job surge is led by South Bay, San Francisco, East Bay.”

See the table below for approximate interest rates.

Type Rate Fixed Term
Apartments 3.945% – 4.480% 3 to 10 year (30 yr amortization)
Commercial 4.245% – 4.780% 3 to 10 year (25 yr amortization)
SBA Lending Call for Options Call for Options