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Opportunity Zone Investing?

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  •  Zekchar 
    Participant
    Status: Physician
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    Joined: 06/24/2018

    Hi Team,

    I’m following the “rules” laid out by Dr. Dahle.  Been looking to extend myself into the real estate sector and my broker sent me the following link to consider:

    http://scopportunityzone.com/

    Seems that there are some “opportunity zones” in whom the government is subsidizing investments by giving some tax breaks.  According to the website, the incentives are as follows:

    What are the incentives that
    encourage long-term investment in low-income communities?

    The Opportunity Zones program offers investors the following incentives for putting their capital to work in low-income communities:

    • Investors can roll existing capital gains into Opportunity Funds with no up-front tax bill.
    • A 5 year holding increases the rolled-over capital gains basis by 10%
    • A 7 year holding increases the rolled-over capital gain investment basis 5% for a total of 15%
    • Investors can defer their original tax bill until December 31, 2026 at the latest, or until they sell their Opportunity Fund investments, if earlier.
    • Opportunity fund investments held in the fund for at least 10 years are not taxed for capital gains.

     

    Questions:

    1) Is this worth pursuing

    2) Anybody have any experience in investing in these “zones?”

    3) Anybody have any luck rolling over their capital gains into “opportunity funds?”

    As always, any feedback would be greatly appreciated.

    #153153 Reply
    DMFA DMFA 
    Moderator
    Status: Physician
    Posts: 2016
    Joined: 06/24/2016

    Seems like a TCJA extension of the “promise neighborhoods” that existed under the previous administration.

    https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

    https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

    Honestly seems like a p good deal for those willing to take the risk.  Multi-family or business could be pretty strong.  You’re buying a share of a REIT, p much, as a limited partner or corporate shareholder.

    I haven’t personally done any of these myself yet, but I can ask some real estate investors I know.  They’re probably doing fine with their current syndications which focus mostly on mutli-family housing, but it’s intriguing.

    "I like money." - Frito Pendejo (Idiocracy)

    [Not a financial professional (yet), lawyer, or employee of The White Coat Investor]

    #153160 Reply
    Liked by Donnie, Zaphod
    wonka31 wonka31 
    Participant
    Status: Physician
    Posts: 312
    Joined: 03/24/2018

    These are fascinating and I have been watching them very closely over the past few months. I have looked at these mostly from a real estate perspective. Having said that, business, etc. that have headquarters in an OZ count as well (not interested in this personally, others may like that concept) The issue is, the investment options are very limited at this time. Given the timeframe of the 7 year hold to hit the second hurdle with the tax breaks scheduled to expire in 2026, many people are expecting these to become more mainstream in late 2018/early 2019. The issue is, they are currently legal, yet the details are still being worked out by congress. I think the smart groups are showing some restraint until they get more direction from congress to make sure it is done right.

     

    The tax breaks may make sense for some, especially given that you can exchange any capital gain (not just real estate like a 1031) into a OZ fund. What’s nice is that not all of the opportunity zones are in terrible areas. Check a few of the cities you know well, you may realize this as well. Near my city, a few of the zones are in ‘up and coming’ areas that have already started to take off and improve 2+ years ago. One of the areas is already built up and ‘overpriced’. There are some areas that are riskier than others, but there are spots that are far from  a huge risk/gamble considering the current momentum in these areas.

     

    Currently, I’m taking a ‘wait and see’ approach. I’d say 60/40 I end up exchanging some LTGC from my taxable account into one of these, while re-buying the same index funds with ‘new money’ during my monthly direct deposit to Vanguard. I like that if a recession does inevitably come, probably less than 7 years from now, you can ideally hold the fund through the rough patch and come out with a nice gain and tax break. Again, we’ll see, but a very interesting gift from the government that is definitely worth monitoring very closely.

     

    As always, don’t let the tax tail wag the dog, which is why I haven’t leaped just yet.

    #153199 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
    Posts: 3717
    Joined: 05/13/2011

    I’m skeptical that even with the tax benefit this will be a good investment. There’s a reason people don’t invest in these places, and it isn’t necessarily racism or some other ism.

    I had a fund approach me to advertise/promote. Can’t remember what happened, but I think they just wanted me to write about them for free.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #153200 Reply
    wonka31 wonka31 
    Participant
    Status: Physician
    Posts: 312
    Joined: 03/24/2018

    Also, Senator Booker (possible future democratic presidential nominee) was one of the champions for this bill. I don’t mean this to be political, but if he does make a push towards president with a 2020 campaign, there is a chance these get extended, leading to the potential of a 10yr hold and crossing the third hurdle.

     

    This is one of the few investment bills in recent memory that was seemingly bipartisan and may have legs that extend well beyond 2026. Given the current state of the economy, I suspect a ton of capital will be dumped into the OZs. It’s a tax break that is tough to overlook for the wealthy, as well as small to medium sized businesses. I just hope that it is done well and rejuvenates these areas. It would be good for the neighborhoods and, selfishly, potentially good for me.

    #153201 Reply
    wonka31 wonka31 
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    Status: Physician
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    Joined: 03/24/2018

    Reply to WCI, sorry I screwed up the copy/paste of your post.

     

    I think this is a fair assessment. Definitely a ‘wait and see’ approach, there’s definitely no free lunch when it comes to these. I think it’ll be either boom or bust and we will see what happens in the next 6-8 months given the timeframe of the expiration date.

    One of two things will happen

    1) A lot of real estate sponsors will hit this hard, in which case I have more interest and confidence in this investment assuming they are reputable, long-term players. I may enter the space if this occurs.

     

    2) There will be a few sponsors who advertise hard with the ‘new and shiny OZ funds’, which will be just as telling. I will be all out if that’s the case. They will get investments from the people who let the tax tail wag the dog or who want to be too cool for school.

     

    There are a few funds currently out there, including Virtua and Fundrise already marketing them. I think it’s a bit premature and risky at this point. That risk may or may not improve with time.

     

     

    #153204 Reply
    Hank Hank 
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    Status: Attorney
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    Joined: 03/27/2017
    WCICon18

    HUBzone, Opportunity Zone, part of town where you wouldn’t check up on your investment property after dark, etc.

    First, you wouldn’t consider investing in this part of town absent a tax incentive unless you were a very deep value real estate investor (or less charitably, a slumlord). Second, in order to invest in this opportunity you will have to part with a considerable bit of money. You also are betting that you are smarter than the guy selling to you and that you eventually will find someone who will pay you more than you paid plus appreciation of: 1) the S&P 500; 2) other investment properties in better parts of town; or 3) some other appropriate yardstick. Essentially you’re betting on the greater fool theory of investing both coming and going.

    Could you juice your returns with a nice tax treatment kicker? Sure. Could you also tie up a bunch of capital in a large illiquid investment in a crappy part of town and sweat bullets that the neighborhood gentrifies (or at least doesn’t get worse) and that the fickle government doesn’t change the tax treatment? Yep, you could do that too.

    #153208 Reply
    Liked by Tim
    BuckJoffrey BuckJoffrey 
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    Status: Physician
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    Joined: 05/17/2018

    I’ll check it out thanks! My initial take is that I’m 10 years I could probably double my money 2 or 3 times with value add real estate estate and wipe out most capital gains through conservation easements and captives. I have become more and more wary of directing investments based purely on tax advantages because there are other ways to deal with the capital gains as well.

    Wealth Formula Podcast
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    #153210 Reply
    Liked by Tim, wonka31
     Zekchar 
    Participant
    Status: Physician
    Posts: 10
    Joined: 06/24/2018

    I’m skeptical that even with the tax benefit this will be a good investment. There’s a reason people don’t invest in these places, and it isn’t necessarily racism or some other ism.

    I had a fund approach me to advertise/promote. Can’t remember what happened, but I think they just wanted me to write about them for free.

    Click to expand…

    I’m a bit confused after reading about these … whats the actual process? Lets say there is a 100K house in an “opportunity zone” that I wish to pursue as a real estate investment.  What happen then?

    Step 1 – Buy home, rehab, rent (hopefully with positive cash flows)

    Step 2 – Do step 1 x10 years

    Step 3 – … (Where does the putting capital gains into opportunity fund come into play?)

     

    Thanks!

    #153242 Reply
    wonka31 wonka31 
    Participant
    Status: Physician
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    Joined: 03/24/2018
    #153243 Reply
     G 
    Participant
    Status: Physician, Small Business Owner
    Posts: 1105
    Joined: 01/08/2016

    I really hope this thread grows.

    It is super interesting to sweep away LTCG tax liability, but I am not sure it would be a good fit for me.  I plan to use my taxable account to fund retirement/semi-retirement til I start withdrawing from 401k.  Yeah, I have a fair bit of cap gains in taxable built up over the last ten years, but not enough to liquidate to make it worthwhile.  I guess I could swap some real estate into an O-Zone but since I have no plan to sell, cap gains is a non-issue here too.  Now, if our business sold out to PE or a CMG…can we somehow take those gains and invest into an O-Zone?

    Regardless, it seems like another cart-before-the-horse scenario because I can’t find how to join/create an Opportunity Fund.  There don’t seem to be any local resources for this.  Is this where folks use Fundrise?

    In terms of the shadiness of the locations…I’m not sure that is necessarily true.  Looking at a map of my city, one of the zones is 1/3 mile from my first house as an attending and in a neighborhood that is gentrifying at a shocking rate.  @hank, this is a place where you might actually want to visit after dark based on the restaurants and bars that have popped up over the last 12 months!  This is the opposite of impoverished.

    #153304 Reply
    wonka31 wonka31 
    Participant
    Status: Physician
    Posts: 312
    Joined: 03/24/2018

    G-

    Yes, capital gains from the sale of a business count. From what I have read, any capital gains can go into an OZ. Again, definitely a wait and see scenario, but intriguing.

    #153308 Reply
     DCdoc 
    Participant
    Status: Physician
    Posts: 189
    Joined: 06/14/2016

    I also hope this thread grows. It’s something I’ll keep on my radar. I don’t yet understand what role the location plays. You’re moving highly appreciated assets with potential LTCG into WHAT? An impoverished town? What exactly is the asset invested in? I’ll do my own research and I’m glad the OP mentioned this. I don’t have a ton of highly appreciated assets but if I hold some stocks without selling in the next 10-20 years (hopefully) by then I will. Also at that point it’ll be clearer whether or not this is a viable strategy.

    #153309 Reply
     westcoaster 
    Participant
    Status: Physician
    Posts: 37
    Joined: 02/17/2016

    The OZ investing is about to catch fire.

    https://www.nytimes.com/2018/11/14/us/politics/amazon-hq2-long-island-city.html?action=click&module=Top%20Stories&pgtype=Homepage

    Amazon HQ2 likely selected in part as it is in an OZ. Also, in past 3-4 days a number of big OZ fund portfolios are being announced.

    I see the biggest advantage of the OZ is taking investments with HUGE capital gains in retirement and moving those into a conservative OZ fund (if there ever is such a thing?), holding 10 years, and removing it without capital gains in 2026 without penalty. This is probably nicest for any retiree with large gains in their pre-2000 investments.

    #171556 Reply
    wonka31 wonka31 
    Participant
    Status: Physician
    Posts: 312
    Joined: 03/24/2018

    They are catching fire now that the treasury has made the rules more clear. A few of the bigger, more experienced firms are starting to launch them now. I’m looking at one very closely now, likely will invest my yearly real estate allocation into it.

    #171557 Reply

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