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Opportunity Zones – The Top Three Things Advisors Should Know

Opportunity zones were created by Tax Cuts and Jobs Acts of 2017 to encourage real estate and corporate development in low-income communities. Under this program, a taxpayer can defer an unlimited amount of tax, and obtain additional tax exclusions if certain requirements are satisfied, on gains reinvested in a Qualified Opportunity Fund or (QOF).

This has been called one of the best capital gains tax reduction programs of a generation. So why aren’t more people investing? One reason is that because this is such a new program, advisors either don’t know enough about it or their firm doesn’t yet have a vetted QOF for them to recommend.

Enter Caliber. As top experts in the field – and one of the first organizations to launch a QOF – we spend a considerable amount of time and resources meeting with financial advisors across the country, educating them about opportunity zones.

Below are a few things advisors need to know about opportunity zones. Contact Caliber today if you are interested in learning more.

Single vs. Multi-asset Funds

Many of the first QOFs to open have been structured as single-asset funds. On the surface, these are appealing investments – one asset is simple to understand. If you are working with a small firm, a single property is more easily managed than a large portfolio.

However, the case for diversification is tried and true: don’t put all your eggs in one basket.

While we do our best to predict future growth and market changes, no one has a crystal ball. Opportunity zone investments must be held for 10 years to realize the full tax benefits, so if an asset stops producing gains or a certain market struggles, you are stuck.

A multi-asset fund allows investments to be spread across several properties and markets, increasing the chance of profitability. The new regulations have also granted funds the ability to sell underperforming assets and reinvest the gains into other ozone qualified projects, maximizing potential gain.

Due Diligence Is Key

Managing a QOF is about 20 times more difficult than a typical private real estate fund. Among a multitude of very specific regulations, a QOF must hold at least 90 percent of its investments in opportunity zone assets and the project must meet several guidelines regarding renovation and community improvement.

The funds are audited twice a year and, if found to be noncompliant, the investor forfeits all tax benefits and must pay a fine. Don’t let this happen to you. Advisors work hard to protect their clients and must ensure their opportunity zone partners know what they are doing.

Caliber has a 10-year track record of successfully managing projects that today would fall into a qualified opportunity zone fund. What’s more, we’ve assembled a professional services team that includes industry experts at Snell & Wilmer, LP; Marcum, LLP; and Novogradac & Company LLP.

Time is of the Essence

While there is still some hesitation and uncertainty surrounding these funds, accredited investors and advisors cannot afford to take a “wait and see” approach. Capital must be invested into a Qualified Opportunity Fund within 180 days of being recognized. Additionally, tax efficiencies begin to lessen after 2019, so investors need to act now to maximize the benefits of the program.

Investors who recognized capital gains from a partnership or S corporation in 2018 only have until June 28, 2019 to reinvest those funds into a QOF. The time for action is now.

If you are interested in learning more about opportunity zones or investment options, please contact me at Travis.Okamoto@CaliberCo.com.

Opportunity Zones – The Top Three Things Advisors Should Know
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