Opportunity Zones for Real Estate Strategies (Explained)
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Opportunity Zones for Real Estate Strategies (Explained)


(ethereal music) – [Toby Mathis] Alright, what’s the advantages of becoming an Opportunity Zone business? You want to hit this?
– Go ahead instance. – [Toby] Or I can hit this all day long. This is crazy so… Here’s the deal, with the Opportunity
Zone, the Tax Cutting– – [Both] Jobs Act. – [Toby] The TCJA, I’ll just call it the Trump Tax Act. So is it too late to issue a 1099 or not? Someone just asked. It’s not too late, but I
probably wouldn’t for 2018. You are late you’re
going to pay a penalty. And it depends on who it is too. If it’s a large amount,
I would pay the penalty and just go ahead and do it. If it’s a small amount,
then I probably wouldn’t. I’ll take my chances. What are the advantages of becoming an Opportunity Zone business? So here’s how it works. The Tax Cutting Jobs
Act, created these areas where they need, basically economically disadvantage areas where they want people to
invest in the businesses and in the properties there. And so all states came up
with a list of the zip codes that were their areas, what they call Opportunity Zones. So disadvantaged areas
that need investment. What is good for the investor, is that you can defer your
capital gains, any capital gains. If you invest in what’s called
an Opportunity Zone fund. So it’s a LLC taxes of partnership, LLC taxes of corporation or a corporation. Those are your Opportunity Zone funds. As long as you invest
those funds within 180 days of the taxable event, so you sell some Bitcoin or you sell stock or you sell property and within 180 days of the sale, you put it in
an Opportunity Zone fund. And that Opportunity Zone
fund, invest 90% of it’s assets in the Opportunity Zone. So if it has a million dollars, it needs to buy 900,000
of Opportunity Zone, property or business. The reason people do this is two fold. The number one reason is because
you’re deferring that gain. You do not eliminate
that gain that you have. So let’s say Jeff sells a
million dollars of Bitcoin. He owes, lets say it’s long term, he’s held it for over a year. He owes long term capital gains in 2019. He just sold it. He puts it into an Opportunity Zone fund that’s buying Dairy Queens
in Opportunity Zones. I’ll just use that as an
example, instead of real estate. I know all of you guys want
to talk about real estate, but this can be businesses too. And Almen this is going to
make sense here in a second of how it’s different
then a 1031 exchange. So I put the money into this thing. My million dollars are
just million dollars, he doesn’t pay tax on in 2019. He doesn’t pay tax on it in 2020. He doesn’t pay tax on it in 2021, 22, 23, 24. Then comes 2026. He will pay tax on that money in 2026. But he will also get what’s
called a step-up in basis on a portion of it. And that potion of it is 15%. So, if Jeff has that million dollars he would owe tax on, when are taxes due? April 15th of next year if he sold it this year. So he’d owe tax on a million bucks, he’d owe 20% on a million bucks, plus the state. Well we’re in Nevada, so
there’s no state income tax. So he’d owe $200,000. What he gets to do is he gets to not only does he not have to pay that $200,000 but he gets a step down or step-up. He’s going to not have
to pay tax on 15% of it. So he’s going to pay tax on 850,000. – [Jeff] Um-hm. – [Toby] And let’s say it’s
still 20% and it’s 850,000. He’s going to pay 170,000
not the 200, in 2026. So that’s benefit number one. Benefit number two is the investment. He put a million dollars
into an Opportunity Zone and let’s say that million dollars becomes worth five million. So long as Jeff holds that
property for 10 years, so he has these Dairy Queens and he owns them for 10 years. He pays zero tax on that growth. So at the end of 10 years, Jeff sells all of his Dairy Queens. And he gets to keep $5
million in his pocket. So Jeff paid, instead of
200,000 of tax if he had done this without using
the Opportunity Zone, he would have paid 170,000. Plus if he had done his own money, he would have had to pay on all that gain, four million dollars worth of gain. He would have paid another 800,000. He would have paid up basically a million dollars taxes.
– A million dollars, yeah. – [Toby] He instead is paying 170,000. So he lowered his tax bill by $830,000 under that scenario. And I just pulled that up out of my ear. How long can you park the
money before reinvesting? Somebody asked about this. So when you put your money into an Opportunity Zone fund, there’s a testing period every six months or the end of the year. Where they dev 90% needs to be invested in the Opportunity Zone. So you literally have to put that money in use, I would say within six months. So I was talking about
it with Clint today, one of my partners. And we’re not aware of
anything that accelerates that. If Jeff sells his Bitcoin, puts it in a fund and that
fund deploys those resources three months later. Technically Jeff could be,
nine months after the sell date and still be in compliance. How do you find those
Opportunity Zone funds? They’re out there, or you make your own. So you can become your
own Opportunity Zone fund by creating your own Opportunity Zone LLC tax as a partnership or corp. And we have to do a special filing. I think it’s 8996 that we’re filing. And you’re deferring it
with an 8949 on your 1040. – [Jeff] Right. – [Toby] See I love tax forms. I only know that because a Jeff, he knows the tax forms. Kent, what is required to move an existing business
to an Opportunity Zone? I don’t think you can take
something that you already own and make it into an
Opportunity Zone property, unless somebody’s investing in
it that’s not related to you. Is it possible to create
an O.Z. fund for unrelated third party investors and
not be a broker dealer? Clay yes that would be
called a Reg D offering or private placing. And yeah, you don’t have to
be a broker dealer to do that. You can get carried interest. You get all these good things and those, but you know, that’s security stuff. And then other then self dealing issues, investing in Opportunity Zones which have an interest standard, because it has to be
someone else’s business. Technically I think it has to
be somebody else’s business but I’m just going to give you this. All I can tell you is
from the tax standpoint, this is how the rules work. You always want to look. And yeah, somebody just said, aye you’ll get a recording of this. Somebody’s asking. This is complicated stuff guys, right? And then somebody just asked
a really good question. Which is, what’s the difference between an Opportunity Zone and a 1031 exchange? So a 1031 exchange is
for real estate only. And you have to exchange
property for more real estate. And when I say property, real property. It’s real estate for more real estate. – [Jeff] Right. – [Toby] So Jeff let’s say
I sell my mobile home park. Can I buy a commercial building? – [Jeff] Yes. – [Toby] I sell my condo, can I buy six single family residences? – You can.
– Yeah. What are the rules
regarding a 1031 exchange? – [Jeff] A 1031 exchange,
you have to identify your replacement properties. Within 45 days of selling your property. – [Toby] Yep. – [Jeff] Everything has
to go through a qualified intermediary, this is basically someone whose going to hold the
cash for you from the sale. The exchange of properties actually has to happen within 180 days. But it has to be one or
more of those properties you initially identified
in the first 45 days. So if you’re going to
do one of these things, you really need to have
your ducks in a row before you start it. – [Toby] Yep, before you
do a reverse exchange, if you’re already at a property, get them to acquire the property for you. And then sell your
property as an exchange. But it has to be a greater or equal value, to avoid the tax. And then your basis just goes forward. So the reason the
Opportunity Zone is so hot is because people are like
hey, I’ll dump a bunch of money into real estate there. The rule on the real estate
is you have to double the improve value or if it’s land, you just have to double the value. Meaning if you buy a
piece of land for 500,000, you have to invest
$500,000 in improvements. If you buy a piece of
property like a building for a million bucks, and
the land is worth 200 and 800,000 is that building, you have to invest
$800,000 in that building. And it just has to be either
you put cash in there, you have 31 months. So if you sell your Bitcoin
for a million bucks, you buy a piece of property for 600,000. And you have 400,000
sitting there in cash. If you put that $400,000 into that $600,000 dollar property, assuming that, let’s say
the land value was 200 and the improvement was 400, then you’re fine as long
as you do all the rehab within that 31 months. If you can’t do it, then a portion of it will be taxable back to the very beginning. It could actually be
pretty nasty if you don’t. So you got to make sure
that you’re picking, when it’s real estate,
that you’re doing it right. God I got a lot of questions on these. This is fun. (chuckles) This is always a kick in
the pants, these questions. Okay if I do a 1031 exchange, rental into a rental, and keep the new rental as a rental for two to four years, then move in and live there
for three to five years, can I sell it and take the home exclusion? I will see accumulated past
depreciation of a rental accounted for at this point. Alyssa, you ask really good questions. So first off, we have investment property
that they were going to make it into personal property. I think you have to
hold it for five years. Investment property to
make it a 121 exclusion. – [Jeff] Oh. – [Toby] And then you have
periods of disqualified use. So usually when doing the opposite, you have a piece of property
that you’ve lived in and owned, and you’ve
rented for a few years and then sell it. The rule is you have to
live in it as your primary residence two of the last five years, and then they’re going to
disqualify a portion of it. Of the total amount of time you owned it for disqualified use. Which is what that rental is going to be. And so went rental, and then
became a personal residence. They’re going to say, alright
you lived in it for five years, you rented it for four years. You’re going to get 4/5 or what ever they call that. Yeah that’s about 4/5
whatever that ratio is, of the $500,000 exclusion
if you’re married or if it’s two of you, it’s 250. And then here’s the most
important thing for you to take away from this Alyssa. The 121 exclusion is
only for capital gains. So it will have zero effect
on your depreciation. Your depreciation after recapture, all of it, but it goes up to 25%. So what I usually do when I
see these types of scenarios is I say, if it was a rental before, make it a rental again
and then sell it under a 1031 exchange and then
you could avoid the tax too. Somebody says where do I find areas that are Opportunity Zones? Is there a website? Yes, you Google Opportunity Zones heat map. And you will find it. It’s one of the first things that pops up. Can an existing property
be classified into an O.Z.? If it is the designation, I don’t know what that means. What is needed to do that? You just have to be in
the Opportunity Zone, which is in a zip code. And somebody says, would this work for
exercising stock options? Yes. When I exerciser they
take taxes off the top and send me the balance. Would like to use the funds
for an O.Z. investment. What about the taxes paid upfront? You will get them back Todd because you’re going to say
I’m deferring all my tax. Right? – [Jeff] I’m not sure about that, because it’s usually a payroll with holding all the stock grants. – [Toby] Oh, well it
depends on what you’re doing with it. If you’re exercising a stock option, and then is he selling the stock? I guess, it would have
to be capital gains. So I believe you’re going to work Todd, but it would have to be capital gain. – [Jeff] Yeah a lot of time with these stock options that you’re up-sizing. You’ve been granted
options by your company, you’re already getting a step-up in basis in that stock, so there’s
probably not going to be a whole lot of capital gains there. – [Toby] Somebody said, let’s see. Somebody asked a real
long, I thought it might be Opportunity Zone related. But there’s lots of questions. – [Jeff] But yeah I notice
with these opportunities– – [Toby] It’s payroll
withholding on capital gain. So as long as it’s capital gains Todd, then you will be able to do it. Yeah so let’s say it’s
an apartment building in the O.Z. area, can you benefit from the capital gain treatment? Yes and if you invest in it for 10 years and it doubled, you
would have paid zero tax. You’re hitting the nail on the head, that’s what they want you to do. They want you to go and there’s
people that are doing it. We have clients that are doing it, Morrine’s a great example. Dumping a lot of money in
there because they know that these properties are
worth a ton after a while. Especially what some
people do is they target apartment buildings with bad management or that have lots of money
that needs to be put into them. So again you have to put
whatever that improved value is that is sitting on that land, you have to double it. – [Jeff] Yeah so you have
to be a little judicious about the property you’re picking out. I like what you’re saying, good ideas. The run down, more
historical type buildings. Or gold mines for something like this. There’s just lots of opportunities here. And it’s obvious that
this credit was designed or this deduction to help
these disadvantaged areas. – [Toby] And somebody just
said, we had the property and we already turned it around. Does it qualify? No, it won’t qualify. But here is what you do. Now you know about it, you already know what you’re doing, target another building
in that Opportunity Zone, pull the money out of the
existing property to invest in it. And then sell something with
a bunch of capital gains. It’s all just cash, you’re just designating ham, deferring the cash or the capital gains that they had on investment X for putting it into this Opportunity Zone. – [Jeff] Right. – [Toby] Doesn’t matter
where you get the money, so I’ll pull the existing
and then I would defer like I say, hey I have a big tax appetite, and I’m going to sell a bunch
of stuff that made money. And I’m not going to pay tax on it. And I’m going to put it
into another building in the Opportunity Zone. So I hope that makes sense. (calm electronic music)

3 Comments

  • allen love

    Funds have 30 months to invest money inside fund…and the basis by down 10% in 5years with an additional 5% by 7.

  • Toby Mathis

    Thank you for commenting, but you are not correct. Here are the instructions to help you when completing the Qualified Opportunity Fund certification with the IRS: https://www.irs.gov/pub/irs-pdf/i8996.pdf
    Look at 26 USC 1440Z-2 for your basis issue. It is a step up and says quite clearly:
    (iii) Investments held for 5 years

    In the case of any investment held for at least 5 years, the basis of such investment shall be increased by an amount equal to 10 percent of the amount of gain deferred by reason of subsection (a)(1)(A).

    (iv) Investments held for 7 years

    In the case of any investment held by the taxpayer for at least 7 years, in addition to any adjustment made under clause (iii), the basis of such property shall be increased by an amount equal to 5 percent of the amount of gain deferred by reason of subsection (a)(1)(A).

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