The Everest Newsletter: Commercial, November ’18 Edition
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Just the Peaks This newsletter, at a glance
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New investment fund opportunities take over this tax season
Get in the zone with lucrative reinvestment strategies
There’s no denying that America is the land of extremes. While the borough of Manhattan is rolling in wealth, neighborhoods in the Bronx and Brooklyn are some of the most impoverished in the country. New York City serves as just a small microcosm of the greater United States and citizens’ ongoing debate over distribution of wealth.
Politics and ethics aside, smart investors should not discount their disadvantaged neighbors. In fact, a new IRS tax break entices people with high-performing assets to finally put their money where their mouths are, all while making a buck in the process. Known as Qualified Opportunity Funds or Opportunity Zone Funds, the program rewards those who reinvest capital gains back into underprivileged neighborhoods.
Beating the taxman—honestly
Last year, over $6 trillion in gains sat untouched or unrealized in mutual funds, stocks, real estate and business. As tax season approaches, the feds are hoping to relocate some of those monies to help revitalize our country’s most economically challenged areas.
In return, participating investors will enjoy a number of financial perks, including deferred tax payments on those specific gains through 2026. If they stay in the Opportunity Zone fund for a minimum of five years, they’ll also save 10% come tax time. After another two years, the percentage goes up to 15%; and for those hanging on for at least ten years, any new gains realized will be 100% tax free. Talk about opportunity!
There’s been buzz about the incentive for a year now, but with guidelines just released in October, investors are moving quickly to get in on the action. While the IRS will not release complete regulations until January, CNBC personal finance reporter Sarah O’Brien assures the premise is simple—and profitable. “In theory, anyone—an individual, a group of people or a business entity—can create a fund of any size by setting up a qualifying entity and filing the proper paperwork at tax time.”
Opportunity zone funds
Fast facts, 2018
– Over $6.1 trillion in unrealized gains sat untouched at the end of 2017, prompting the feds to incentivize reinvestment
– The 8,700+ official Opportunity Zones across America [both urban and rural] are home to over 35 million people
– Once established, each fund must dedicate at least 90% of raised monies to projects inside the Opportunity Zone
– Secretary of the Treasury Steven Mnuchin projects total investment as high as $100 billion as a result of the tax incentive
*Stats reported by CNBC and Next City, Oct-Nov 2018
Financial profits—or feel-good politics?
Despite the highly anticipated news from Washington, naysayers came out of the woodwork with a host of complaints. Some worry that the project is just another ‘freebie’ for the uber-wealthy—a massive tax break without any real measure of impact. They also cite gentrification issues, given that many distressed regions already have access to community development capital. It’s true that past incentives have experienced lackluster results, but economists say the Opportunity Zone initiative is different.
First, the effort is nationwide, with individual states and localities calling the shots as to which ‘zones’ will receive funds. Census tracts must have at least a 20% poverty rate, or may qualify under other specific conditions. Next, investors only enjoy the ‘max’ tax break after 10 years, so the reward is commensurate with the wait. And finally, each fund gets to choose which qualifying projects to participate in, so savvy strategy is still in play.
Clients of The Everest Equity Company and big-time firms such as Somera Road, RXR Realty, Normandy Real Estate, Goldman Sachs and others in their ranks, have already begun rounding up capital for express investment in Opportunity Zones. Beyond tax savings, we anticipate even greater gains while helping give back to those less fortunate.
Everest says: this opportunity was worth the wait
Stay tuned for more commercial tax break talk