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Bull Market Exit Strategy: Opportunity Zones

We are in the midst of the longest bull market in history – one that started on March 9, 2009. Of course, it’s not going to last forever, and many ultra-wealthy investors know that and aren’t waiting around for the bear to chase out the bull before cashing out.

Many have already started liquidating their equity positions, but where are they putting their money? One clue could be the Opportunity Zones program.

Save this date – December 31, 2019. It’s important.

Besides being the eve of the new year and a night of celebration, it is also an important deadline in the Opportunity Zones Program.

It’s the last day an investor can rullover realized capital gains into an investment in a Qualified Opportunity Fund and get the full 7-year capital gains deferral benefit of the Opportunity Zones Program.

This would explain the intense interest in Opportunity Zone investments this year. A more thorough explanation of this 7-year benefit can be found below.

Opportunity Zone investments are so hot that 150 people were turned away from an IRS hearing on Opportunity Zone regulations earlier this year. As of March of this year, more than $18 billion worth of investment plans in these zones had been announced, according to the National Council of State Housing Agencies.

Here’s how investors sitting on capital gains from the current bull market stand to benefit by investing by the end of the year.

The Qualified Opportunity Zones program was created as part of the 2017 Tax Reform to encourage development in economically distressed communities by providing significant tax incentives to investors through the deferral of current realized capital gains. 

Here are the three main tax incentives for investors sitting on capital gains:

  • Defer taxes on the original capital gain until the end of December 31, 2026.
  • Reduce up to 10% of the tax bill on the original capital gains if they remain invested in the Fund for at least five years, 15% if they stay for at least seven years (This is why is the December 31, 2019 deadline important).
  • Eliminate the tax on any appreciation (new capital gains) on the original investment after the 10-year mark in the Opportunity Fund.

Investors are rushing to meet the December 31, 2019 deadline to take advantage of the full 15% discount off their current capital gains tax bill that is deferred until December 31, 2026. Investors failing to meet the deadline will only qualify for a 10% discount if they stay in the Fund for at least five years.

The fullowing table illustrates how an investor can benefit from cashing out of this bull market.

Let’s assume a rate of 23.8% (the 20% long-term capital gains rate for high-income taxpayers plus an additional net investment income tax of 3.8% on investments that don’t require any work from the taxpayer (real estate rentals, royalties, partnerships).

Here is the difference between doing nothing and rulling the capital gains into a Qualified Opportunity Fund and staying in the investment for seven years:

With recession signals flashing (inverted yield curve, weakening of the manufacturing and housing sectors, record income inequality), many investors have good reason to expect a recession in 2020.

Many ultra-wealthy investors aren’t waiting for the shoe to drop to cash out of stocks, and many are rulling those capital gains into Qualified Opportunity Funds to defer taxes on those gains and take advantage of the long-term (7-year) discount of up to 15% on those gains.

Are you sitting on the fence?

Now would be the time to take action to take full advantage of the tax benefits of investment in a Qualified Opportunity Fund and to get out before recession hits.

Do you think that this type of fund may be a good fit for you?

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