Qualified Opportunity Zone Funds – A Tax Efficient Investment Vehicle for Those Selling Appreciated Assets

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By Steve Haskell, Vice President – Kay Properties and Investments, LLC

What is a Qualified Opportunity Zone (QOZ)?

A QOZs as described under the 2017 Tax Cuts and Jobs Act is a social program with the intent of redeveloping impoverished districts throughout the country by driving private capital to over 8,700 underserved communities and 35M Americans throughout by offering tax incentives to investors¹.

What is a Qualified Opportunity Zone Fund (QOF)?

A QOF is a legal entity (partnership or corporation) used to invest capital gains into QOZs. A QOZ Fund must hold 90% of its assets in equity investments within business or property within a QOZ. A QOZ Fund must double its basis within a 30 month period in order to qualify for the tax benefits and provide a “substantial improvement” to its assets.² This means that the fund must double its value rapidly which requires a loan.

What are the Benefits of Opportunity Zones?³

QOZ Fund offers a unique opportunity for investors planning to sell stock, REITs, cryptocurrency, bond, jewelry, art, closely held businesses and other assets and potentially defer their capital gains by reinvesting the gain into QOF. Below are the potential tax incentives to consider before investing.

  • When gain from an investment is reinvested in a QOZ Fund held for 5 years, it will receive a 10% step up in basis. However, the investment must be before December 31, 2021.
  • When gain from a previous investment is reinvested in the QOZ Fund and held for 7 years, it will receive a 15% step up in basis. However, the investment must also be made prior to December 31, 2019.
  • All appreciation that takes place within the QOZ Fund will receive a full step up in if held within the fund for 10 years.
  • The investor is NOT required to identify a replacement property in 45 days nor use an accommodator, like they do in a 1031 exchange. Investors must reinvest the assets within 180 days.
  • Investors only need to reinvest the gains from their original investment to achieve the tax advantages offered by a QOF. Investors can pocket their original investment.

I am Selling a Piece of Appreciated Real Estate…. 1031 or QOZ Fund…which option is best for me?

Though QOZ Funds offer multiple potential benefits for investors looking to defer their taxes, for investors selling real estate, a 1031 exchange may be a potentially better option. To help make the determination on which strategy is best for investors, we ask the following questions.

    1. If you are debt free, do you really want to take on more debt? QOZ Funds must finance development within the fund in order to double the basis of the fund within 30 months and qualify for the tax deferral status. This exposes the investor to the risk of lender foreclosure and the potential of losing her entire investment due to foreclosure. If the property does not have a mortgage, there is no risk of lender foreclosure and therefore mitigates a significant amount of risk.
    2. Will you have enough liquidity to pay taxes in 2026? Taxes accrued on the proceeds of the relinquished property and subsequently invested in the QOZ Funds must be paid on December 31, 2026. Therefore, the investor should have enough discretionary income to support a potentially large tax consequence in 2026. If the investor decided to 1031, they have the option to perpetually defer their taxes.
    3. Is a step up in basis important to your legacy planning? If the investor passes away, the investment in the QOZ Funds will not receive a step up in basis to market value. Therefore, the heirs will be forced to pay the tax consequence upon selling ownership in the QOZ Fund.
    4. Did you depreciate your basis? Unlike Real Estate, QOZ Funds do NOT allow you to defer the recapture of deprecation of the underlying asset upon sale. The 1031 exchange allows the investor to perpetually defer recapture of depreciation. At this time, QOZ Funds do not.4
    5. Are you prepared to potentially take on additional risk? The development risk of new construction within a QOZ Fund may not be suitable for investors in their later years who do not have time to overcome the loss. High interest loans are often taken in order to meet the legal requirements of the QOZ Funds and double the basis of the fund. This exposes the investor to significantly more risk than simply purchasing a stabilized asset with minimal moving parts. Finally, QOZ Funds are inherently targeting low income areas. Heavily leveraged development ventures in lower income communities may propose more risk than warranted by the tax incentives.

If you are interested discussing whether a QOZ Fund or 1031 exchange is right for you, contact your registered representative at Kay Properties & Investments at www.kpi1031.com. Please visit www.kpi1031.com for more details, call us at 1.855.899.4597 or email info@kpi1031.com

Qualified opportunity zone funds (QOZs) and Delaware Statutory Trust (DST) properties offered through WealthForge Securities, LLC, Member FINRA/SIPC, and Kay Properties and Investments, LLC are separate entities. While real estate, QOZs and DSTs provide a compelling set of potential benefits to investors, there are material risks associated with investing in QOZ and DST properties including illiquidity, tenant vacancies, general market conditions and competition, lack of operating history, interest rate risks, the risk of new supply coming to market and softening rental rates, general risks of owning/operating commercial and multifamily properties, short term leases associated with multi-family properties, financing risks, potential adverse tax consequences, general economic risks, development risks, long hold periods, and potential loss of the entire investment principal. Additionally, the IRS and Treasury are still in the process of determining how to implement these rules and they may change over time. Sponsors and investors should consult with a tax specialist before pursuing an investment in a QOZ or DST.

Past performance is not a guarantee of future results. Potential cash flow, potential returns and potential appreciation are not guaranteed. For an investor to qualify for any type of investment, there are both financial requirements and suitability requirements that must match specific objectives, goals and risk tolerances.

Diversification does not guarantee returns and does not protect against loss. This material does not constitute an offer to sell nor a solicitation of an offer to buy any security. Such offers can be made only by the confidential Private Placement Memorandum (the “Memorandum”). Please be aware that this material cannot and does not replace the Memorandum and is qualified in its entirety by the Memorandum.

This material is not intended as tax or legal advice so please do speak with your attorney and CPA prior to considering an investment. This material contains information that has been obtained from sources believed to be reliable. However, Kay Properties and Investments, LLC, WealthForge Securities, LLC and their representatives do not guarantee the accuracy and validity of the information herein. Investors should perform their own investigations before considering any investment. There are material risks associated with investing in real estate, Delaware Statutory Trust (DST) and 1031 Exchange properties. These include, but are not limited to, tenant vacancies, declining market values, potential loss of entire investment principal.

Past performance is not a guarantee of future results: potential cash flow, potential returns, and potential appreciation are not guaranteed in any way and adverse tax consequences can take effect. Real estate is typically an illiquid investment. Please read carefully the Memorandum and/or investment prospectus in its entirety before making an investment decision. Please pay careful attention to the “Risk” section of the PPM/Prospectus. All photos are representative of the types of properties that Kay Properties has worked with in the past. Investors will not be purchasing an interest in any of the properties depicted unless otherwise noted.

IRC Section 1031, IRC Section 1033, and IRC Section 721 are complex tax codes; therefore, you should consult your tax and legal professional for details regarding your situation. Securities offered through registered representatives of WealthForge Securities, LLC, Member FINRA/SIPC. Kay Properties and Investments, LLC and WealthForge Securities, LLC are separate entities.

DST 1031 properties are only available to accredited investors (generally described as having a net worth of over one million dollars exclusive of primary residence) and accredited entities only (generally described as an entity owned entirely by accredited individuals and/or an entity with gross assets of greater than five million dollars). If you are unsure if you are an accredited investor and/or an accredited entity, please verify with your CPA and Attorney prior to considering an investment. You may be required to verify your status as an accredited investor.

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