3 Benefits of Investing in Qualified Opportunity Zones

3 Benefits of Investing in Qualified Opportunity Zones

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If you invest a capital gain into a QOZ
deal there’s three tangible benefits. The first benefit is – the initial tax paid on
that capital gain. If I have a million dollar gain on an investment, if I’m not
putting it into a QOZ investment, I will need to pay between
$200,000 and $230,000 of taxes on that gain
for that tax year. So if that was a 2018 gain I would need to pay
that in the next taxable year. My 2018 tax is paid in 2019. If I invest
that into a QOZ the first benefit is – I don’t have to pay that $200,000 on the initial gain anymore, I get to defer it for seven
years, which is an enormous benefit because obviously the time value of
money – if I think I can make five or ten or twenty percent of money a year, having
that $200,000 in my investible universe is much better than
in the IRS’s bank account. The second benefit is if you invest in a QOZ, your
initial capital gain also receives a discount when paid of fifteen percent.
And that’s if you invest through 2019 then the law
steps down to a ten percent, but as of right now you get a fifteen percent
reduction in your initial capital gain and that’s significant too. Let’s go back
to the analogy of the the 1 million dollar gain. You would have a $200,000 tax bill, in this case payable in seven years remember because
you get to defer it, but in addition to deferring it, you’re not paying $200,000 in year 7 you’re paying $170,000 because 15 percent reduction on $200,000 is $170,000. So that’s the second benefit. The third benefit of QOZ which
has people the most excited is – the money invested in the QOZ, if the investment is
held for minimum ten years, if it produces a new gain – so let’s
follow that $200,000 again, that I didn’t pay the IRS today,
but instead I invested into a QOZ. In year 7 I would need to pay that tax
but it would be $170,000 as I said before but now let’s say in 10 years I’ve held
it for 10 years now. It’s not worth $200,000 that’s my initial investment.
Let’s say that that investment now is worth $600,000 and over a 10-year
horizon that I would say that’s a reasonable expectation for the types of
deals you should be doing in QOZ. That gain of $400,000 is not taxed at all and
so that’s the big benefit of QOZ Any new gains created in a QOZ zone if
held for 10 years are tax-free. The idea of the tax incentives in QOZ – they wanted to
create enough power behind the incentives to really influence behavior
and I think that they found the right recipe to do that.

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