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OPPORTUNITY ZONES - TOO GOOD TO BE TRUE?
The investment world is full of “opportunities” that are
currently fashionable and the hot new investment. They go
all the way back to the tulip craze in the Netherlands in the
1630s. Today’s new opportunity is a Qualified Opportunity
Zone Fund (QOZF).
These funds were authorized under the tax act passed in
December 2017 and allow an investor to defer capital gains on
any current investment by 10% if held for five years and 15% if
held for at least seven years. If the new investment is held the
required 10 year time period, then potentially all the capital
gains in the new investment will be eliminated.
You must reinvestment the rolled over money within 180
days of the sale of the previous investment. Only rolled over
capital gains from a previous investment will be eligible for
the capital gains break on the new investment. In other words,
if you invest $1000 and only $800 is from capital gains from
a previous investment, then only the $800 gets the tax break.
There will be good and not so good programs, but the
promoters will make them all seem foolproof and the deal of
a lifetime. So what should you consider in evaluating different
funds?
First, talk with your financial, tax and legal advisors to see
if this type of investment makes sense for you. Consider that
in order to get the full benefit you must hold the fund for ten
years. That can be a long time, especially if the investor is
retired and perhaps in need of the money at some time in the
future. There is a cost to a lack of liquidity.
The Census Bureau and the Treasury Department have
identified blighted areas across the US and have allowed each
state to identify which of these areas will qualify. The hope is
that the tax incentive will attract money to these downtrodden
properties that might not otherwise have found investors
willing to take on the risk.
90 TAMPA BAY MAGAZINE | SEPTEMBER/OCTOBER 2019
V. Raymond Ferrara, CFP®
Chairman
Chief Executive Officer
Eric R. Ebbert, MBA, CFP®
President
How do you separate the wheat from the chaff? Like most
real estate investments, it is about location. But it shouldn’t be
about one location. Multiple locations are better and diversifying
between different types of real estate is desired over single use.
90% of the property in the fund must be qualified, otherwise
the tax benefits are disallowed.
Unfortunately, anyone can start one these funds. So look for
a sponsor with experience in development, not someone new.
You need to review audited financials of the sponsor because
they will need to be around for at least ten years. A larger
enterprise will likely have more resources than a smaller one.
Do they have a strategy and can they actually explain it?
Does the strategy make sense? Can they execute the strategy?
Do they have a good team of financial and legal advisors? If
they are not profitable, then there likely will be no capital gains
so the tax break is lost. In short, it could be like the tax shelters
of the 80s where investors were attracted to the large tax losses
and forgot about economics.
Real estate often is done with borrowed money. The more
leverage, the greater the risk. Is the loan interest fixed? For
how long? If the interest is variable, what are the terms for it
to increase/decrease?
Then there is a matter of fees. Some of the early programs we
have seen are loaded with fees. No sense making inexperienced
and inept sponsors rich off the fees while your money goes down
the tubes. If the fees are too low, that may seem attractive, but
are they reasonable enough to sustain the sponsor?
Once all of this is done, circle back and talk to your advisors
once again. Get a second opinion from a third party. If you would
like to discuss Qualified Opportunity Zone investments or any
other financial planning/investment management matters,
please call for a one hour complimentary conversation in either
our Clearwater or Tampa offices.
About ProVise Management Group, LLC: ProVise is a financial planning and investment management firm registered with the Securities and Exchange
Commission (SEC) and has been in business since 1987. Our 14 professional advisors serve approximately 1100 clients in over 30 states. As of 3/31/19 we
were managing approximately $1.365 billion for our individual, corporate, not-for-profit and 401k retirement plans. Please visit our website at: provise.com.
Investment Advisory Services offered through ProVise Management Group, LLC. The information herein is general and educational in nature and should
not be considered legal or tax advice. Tax laws and regulations are complex and are subject to change.