Author Topic: "Opportunity Zones"  (Read 1708 times)

GreenEggs

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"Opportunity Zones"
« on: October 31, 2018, 05:03:27 PM »
A buddy invited me to lunch today with a couple of financial advisors.  I needed to get out of the house and figured a free lunch was a good enough reason.


The topic they lightly discussed was about "opportunity zones".  I listened and think I understood the basics, and asked them to email me more details.


The basics are that you can invest the amount equal to whatever capital gains taxes you have into distressed geographic areas that have be marked by the government as "opportunity zones".  They also mentioned being able to invest the funds in securities and borrow against the funds, using them as leverage.  They also mentioned ways to defer the taxes and even totally avoid them, but I couldn't really grasp the details over a short casual lunch.

Anyway, I was wondering if any of you know anything about opportunity zones?  A quick google search shows articles that are only a day or two old, so I think this must be a recent thing.

I'm all for utilizing funds that would have otherwise been paid as a capital tax bill for both personal and social gains.   

terran

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Re: "Opportunity Zones"
« Reply #1 on: October 31, 2018, 05:15:45 PM »
MMM's accountant has been writing about it a bit recently. These might help: https://wealthyaccountant.com/2018/10/23/opportunity-funds-deferred-and-tax-free-gains/ and https://wealthyaccountant.com/2018/10/29/reduce-your-taxes-to-zero/

I have a hard time seeing how these are going to be good investments. Seems like there's too much opportunity for high fees, opaque investments and by definition you're investing is areas that are struggling economically. Hearing your story about being taken out for "free" lunch by a couple of financial advisors seems to me to support my belief that this will probably make the people selling these investments a lot of money, but maybe not so much the investor.

GreenEggs

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Re: "Opportunity Zones"
« Reply #2 on: November 01, 2018, 04:44:54 AM »
Thanks for the links.  I looks like great info.  I hadn't seen that site before.


My buddy recently sold his business and is scrabling to figure out how to minimize the capital gain tax hit.  I sent him the links last night as soon as you posted them.  Hopefully he'll read it and get an understanding so he can ask the right questions.


I will be selling off some property soon, so will be facing similar capital gains concerns then.  Thankfully I will have a bit more time to learn about the options. 


I'll print the articles and reread them a few times before meeting with my accountant.  Hopefully these concepts aren't news to her. 




DoNorth

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Re: "Opportunity Zones"
« Reply #3 on: November 11, 2018, 11:57:54 AM »
My take on this is that if you are a real estate investor, you can self designate with the IRS, form your own LLC and buy and hold rentals under the LLC as long as the properties fall within an opportunity zone.  Assuming you hold for at least 10 years, there would be no capital gains at the time of sale and there would be a sliding phaseout the earlier you sell.


katsiki

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Re: "Opportunity Zones"
« Reply #4 on: November 12, 2018, 08:44:50 AM »
Curious about this too.  Most of the map sites for this aren't great.  Has anyone found a good map site for this data?

Found this one: https://www.enterprisecommunity.org/opportunity360/opportunity-zone-eligibility-tool

It is pretty useful.
« Last Edit: November 12, 2018, 09:03:57 AM by katsiki »

chuckster

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Re: "Opportunity Zones"
« Reply #5 on: November 13, 2018, 04:07:14 PM »
I think I overheard something about this on the Motley Fool podcast, it lined up with how you described it: rolling a taxable investment into an Opportunity Zone lets you avoid capital gains if you hold for a certain amount of time (10 years?)

Lucky Penny Acres

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Re: "Opportunity Zones"
« Reply #6 on: November 16, 2018, 09:22:59 AM »

Here is a decent explanation I came across with some number examples:
https://jvltax.com/268/qualified-opportunity-fund/

If you have a current capital gain and invest that capital gain into a qualified opportunity fund (which can include a LLC you set up yourself), you can defer tax on that current capital gain until 2026, reduce the amount of the current capital gain subject to tax by up to 15% and exclude all gains within the qualified opportunity fund if you hold it for ten years.

The whole point of the program is to help boost the economy in the opportunity zones by encouraging more investment. The hope is that people looking for a tax break will invest in economically depressed areas by building or taking over run down real estate and launching businesses in those areas which in theory should help unemployment and revitalize depressed areas.

oldmannickels

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Re: "Opportunity Zones"
« Reply #7 on: November 16, 2018, 09:59:26 AM »
https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

Here's the best map:
https://www.cims.cdfifund.gov/preparation/?config=config_nmtc.xml

On the right hand side selected overlays, then uncheck "2011-2015 LIC Census Tract All"

There are a lot of people who will make out well from the opportunity zones, but I really don't feel like I've seen a completely accurate analysis of how this will all work. People who are trying to sell you on idea like this will always highlight all the good and none of the bad. Some things that come to mind are depreciation recapture is excluded from deferral, basis issues between the deferred gain and financing, substantial improvement requirements, holding period requirements, maintaining the capital nature of the gain throughout the holding period requirement, and any changes to law that might occur between now and 9.5 years from now.

blackletterlaw

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Re: "Opportunity Zones"
« Reply #8 on: December 09, 2018, 08:07:13 AM »
I think that Opportunity Zones are kind of like LIHTC (Low Income Housing Tax Credits) where the biggest thing that can go wrong is that you violate the program's requirements...that is to say the biggest cost/downside is going to be due diligence over the 10 year period...on top of the start up costs.

sol

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Re: "Opportunity Zones"
« Reply #9 on: December 09, 2018, 08:28:19 AM »
I think that Opportunity Zones are kind of like LIHTC (Low Income Housing Tax Credits) where the biggest thing that can go wrong is that you violate the program's requirements...that is to say the biggest cost/downside is going to be due diligence over the 10 year period...on top of the start up costs.

I think the biggest thing that can go wrong is that you lose money.  I've looked at the maps for my area, and as a current landlord there is no way I would want to own a rental in any of those places.  Not unless I'm trying to own a condemned meth lab.

At least around here, those appear to be areas with rampant crime, no public transportation, the worst possible schools, and horrendous exposure to natural disasters.  Much of it is what I consider "disposable" land, the kind of place you know will get wiped out by the next volcanic eruption or major flooding event, only suitable for trailer parks and expendable low-grade industry.  It's not where you would choose to build anything you expect to last a hundred years.  Maybe it's better where you live?

If I were to buy a rental property inside the closest zone to my house, I would expect to deal with evictions regularly.  I would probably have to make it section-8 housing in order to find people who could afford it, and that comes with all kinds of other headaches.  I would just assume there was illegal activity taking place on my property, and I would constantly worry about vandalism and arson.  Frankly, I'd rather pay capital gains taxes.  I already have enough money that I'm willing to spend some of it to reduce the amount of stress in my life.

Kl285528

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Re: "Opportunity Zones"
« Reply #10 on: December 09, 2018, 09:33:17 AM »
Interesting possibilities here! There are some up and coming areas that fall within those zones in my city. Thanks for the idea.

tralfamadorian

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Re: "Opportunity Zones"
« Reply #11 on: December 09, 2018, 10:07:20 AM »
In the markets that I know very well, the opportunity zones are ~95% no way and ~5% good pockets. The good spots are universally surrounded by the not nice areas on three sides with an easily identified border on the fourth- a major road, a park, etc. I won't go out of my way to try to take advantage but if a good property becomes available in those spots, I would definitely look into it further. 

On the flip side, the opportunity zone maps are a good cheat sheet to help determine your D class to stay away from in a new market.

katsiki

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Re: "Opportunity Zones"
« Reply #12 on: December 09, 2018, 02:03:53 PM »
Interesting perspective, @sol.   There is not much available in my state at all, but the area I am familiar with is undesirable.

sol

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Re: "Opportunity Zones"
« Reply #13 on: December 09, 2018, 03:12:29 PM »
The more I think about this whole thing, the more pissed off I get.  How is this not just a tax break for slumlords?

GreenEggs

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Re: "Opportunity Zones"
« Reply #14 on: December 09, 2018, 05:05:39 PM »
The more I think about this whole thing, the more pissed off I get.  How is this not just a tax break for slumlords?




I think you are only seeing it for real estate investing.  From what I understand it is for investing in almost all types of business investing.  Many of the zones are in small towns and rural areas.  There is a lot of need for investing in those places and this is an incentive to get private investors to fund projects where the need exists.  Most small towns & rural areas need jobs more than they need housing.  Often a large employer left and the area has been struggling ever since. 


I believe most investors will invest in OZ funds rather than self invest.  Funds would spread the risk by investing in multiple businesses and perhaps also in a variety of industries. 


If this was just a loophole for slumlords I'd be pissed off too.  Real estate has always had 1031 exchanges anyway.  Maybe OZs should be seen as a chance to move some of the money from real estate into other industries.  Instead of paying capital gains taxes and hoping the government makes good choices with the money this lets investors choose where that money get reinvested.  How is that a bad thing?






sol

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Re: "Opportunity Zones"
« Reply #15 on: December 09, 2018, 05:25:12 PM »
Instead of paying capital gains taxes and hoping the government makes good choices with the money this lets investors choose where that money get reinvested.  How is that a bad thing?

Because it distorts the market by incentivizing bad investments?

As a private investor, I would not normally invest in any property or business located in the areas designated as opportunity zones near me.  These are economically depressed areas with dismal prospects for improvement.  Why is the government "choosing" to nudge private investors to pour money into these areas, instead of the more profitable and successful ones right next door?  This just seems like deliberate sabotage, like giving people a tax break if they invest in betamax or buggy whips.  Let the market work! 

Some areas absolutely deserve to be hollowed out shells of their former selves.  Rural towns without local employers are already dead and just don't know it.  There is absolutely no reason, other than sentimental nostalgia, to undermine our national progress by encouraging people to prop up an unsustainable lifestyle in an unsustainable place.  You have to accept change, even if it means your childhood home in a West Virginia coal town has to razed.  You can't cling to failed economic models without harming both your own investments and the nation as a whole.

GreenEggs

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Re: "Opportunity Zones"
« Reply #16 on: December 09, 2018, 06:13:21 PM »
Instead of paying capital gains taxes and hoping the government makes good choices with the money this lets investors choose where that money get reinvested.  How is that a bad thing?

Because it distorts the market by incentivizing bad investments?

As a private investor, I would not normally invest in any property or business located in the areas designated as opportunity zones near me.  These are economically depressed areas with dismal prospects for improvement.  Why is the government "choosing" to nudge private investors to pour money into these areas, instead of the more profitable and successful ones right next door?  This just seems like deliberate sabotage, like giving people a tax break if they invest in betamax or buggy whips.  Let the market work! 

Some areas absolutely deserve to be hollowed out shells of their former selves.  Rural towns without local employers are already dead and just don't know it.  There is absolutely no reason, other than sentimental nostalgia, to undermine our national progress by encouraging people to prop up an unsustainable lifestyle in an unsustainable place.  You have to accept change, even if it means your childhood home in a West Virginia coal town has to razed.  You can't cling to failed economic models without harming both your own investments and the nation as a whole.




Nobody says you have to choose a bad investment.  It's your duty to choose something that works.  A business can fail anywhere. 


Warren Buffett made it big in Nebraska.  Sam Walton made it big in Arkansas.  Disney made it in the middle of Florida.  There's opportunity everwhere. 








KeithTax

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Re: "Opportunity Zones"
« Reply #17 on: December 28, 2018, 02:13:59 PM »
MMM's accountant has been writing about it a bit recently. These might help: https://wealthyaccountant.com/2018/10/23/opportunity-funds-deferred-and-tax-free-gains/ and https://wealthyaccountant.com/2018/10/29/reduce-your-taxes-to-zero/

I have a hard time seeing how these are going to be good investments. Seems like there's too much opportunity for high fees, opaque investments and by definition you're investing is areas that are struggling economically. Hearing your story about being taken out for "free" lunch by a couple of financial advisors seems to me to support my belief that this will probably make the people selling these investments a lot of money, but maybe not so much the investor.

If you read my post on Opportunity Funds you will also see how laughably easy it is to start your own OF. That way there will ne no fees and you control the investment.

lhamo

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Re: "Opportunity Zones"
« Reply #18 on: December 28, 2018, 04:34:22 PM »
I think that Opportunity Zones are kind of like LIHTC (Low Income Housing Tax Credits) where the biggest thing that can go wrong is that you violate the program's requirements...that is to say the biggest cost/downside is going to be due diligence over the 10 year period...on top of the start up costs.

I think the biggest thing that can go wrong is that you lose money.  I've looked at the maps for my area, and as a current landlord there is no way I would want to own a rental in any of those places.  Not unless I'm trying to own a condemned meth lab.

At least around here, those appear to be areas with rampant crime, no public transportation, the worst possible schools, and horrendous exposure to natural disasters.  Much of it is what I consider "disposable" land, the kind of place you know will get wiped out by the next volcanic eruption or major flooding event, only suitable for trailer parks and expendable low-grade industry.  It's not where you would choose to build anything you expect to last a hundred years.  Maybe it's better where you live?

If I were to buy a rental property inside the closest zone to my house, I would expect to deal with evictions regularly.  I would probably have to make it section-8 housing in order to find people who could afford it, and that comes with all kinds of other headaches.  I would just assume there was illegal activity taking place on my property, and I would constantly worry about vandalism and arson.  Frankly, I'd rather pay capital gains taxes.  I already have enough money that I'm willing to spend some of it to reduce the amount of stress in my life.

Agree that many of the zones in WA are risky given current economic/geographic factors, but this one might be worth considering:

https://www.policymap.com/report_widget?pid=242202&type=op&area=predefined&sid=2010

Includes the area immediately around the planned Lynnwood light rail station.  Will be gentrification central as the station gets closer to coming on line.  Still reasonably affordable now, though. 

NonprofitER

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Re: "Opportunity Zones"
« Reply #19 on: January 04, 2019, 09:14:50 AM »
I read this thread out of curiosity because I hadn't heard of Opportunity Zones before. Turns out I live in one!  Ha!

I can attest that my neighborhood is NOT full of drug dealers and halfway houses. I live in a "gentrifying" neighborhood near the urban core of Austin, TX and had planned to invest in rental properties in my area anyway. For what its worth, I'm not a slumlord.  :)

Valuable info!  Not all of these zones are in terrible places.

GreenEggs

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Re: "Opportunity Zones"
« Reply #20 on: January 07, 2019, 06:58:22 AM »
I'm curious about what's involved in creating your own OZ fund.  It seems that would allow much more flexibility in how (and when) the funds are invested. 


I have a neighbor who recently sold a business that is looking into creating a fund.  We've both had busy schedules lately, but I need to get together with him in the next few weeks and see what he's figured out.


I'll be selling some properties in the near future and may have some gains to consider.  Oppoutunity Zones seem more appealing to me than 1031s, but I need to read more about both of them.   

blackletterlaw

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Re: "Opportunity Zones"
« Reply #21 on: January 07, 2019, 09:38:34 AM »
Start at the source.
The IRS has a simple FAQs on QOZs at: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions.

The link above also has links to other resources provided by the IRS. With some reading, I think you should be able to educate yourself and find the answers you need on there...

Michael in ABQ

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Re: "Opportunity Zones"
« Reply #22 on: January 13, 2019, 03:06:59 PM »
I recently attended the ground breaking of a new industrial park that is in an opportunity zone. Basically it's a chunk of hilly desert near the airport where the closest home is on the other side of a freeway probably 3/4 of a mile away. It's right along the only entrance to a master-planned greenfield community with several nice office and industrial buildings, a movie studio that Netflix just purchased, and a couple hundred new urbanism style home that start in the upper 200s. However, If you go across that freeway it's an area known for polluting heavy industry and most of the area is economically depressed.

Miss Prim

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Re: "Opportunity Zones"
« Reply #23 on: January 14, 2019, 03:11:06 PM »
Well this is an interesting thread!  I was looking at the map of OZ's and my old house that I sold 25 years ago is in an opportunity zone.  It was a nice neighborhood of older houses, but the area was not appreciating like other surrounding areas and if we had bought in a different area, we probably would have realized more profit.  It seems like what you would save in capital gains you would lose in appreciation of your property.  Definitely something to think about.

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katsiki

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Re: "Opportunity Zones"
« Reply #24 on: January 14, 2019, 08:18:11 PM »
I read this thread out of curiosity because I hadn't heard of Opportunity Zones before. Turns out I live in one!  Ha!

I can attest that my neighborhood is NOT full of drug dealers and halfway houses. I live in a "gentrifying" neighborhood near the urban core of Austin, TX and had planned to invest in rental properties in my area anyway. For what its worth, I'm not a slumlord.  :)

Valuable info!  Not all of these zones are in terrible places.

+1.  I went back and looked at a few areas in my state.  There are some good areas that I didn't notice on the first map site I looked at.  I also noticed a really good commercial area.  Not my cup of tea but someone who knows what they are doing with real estate might do well.