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When it comes to managing capital gains tax, are Opportunity Zones the solution? Are these funds, in fact, the quintessential hedge in an uncertain and rapidly-changing economy? As awareness increases, investors and advisors look to QOZ funds (and their deadlines) as a primary vehicle for their gains.
Ashley Tison is founder and president of OZPros, a national leader in helping people with capital gains harness the generational wealth creation opportunity of Opportunity Zones.
Click the play button above to listen to our conversation with Ashley.
- Why qualified Opportunity Zones represent a quintessential hedge against uncertain tax rates.
- Important tax deadlines and timetables relevant to the Opportunity Zone investments.
- Strategies on how to navigate the Opportunity Zone Fund to realize its intended tax benefits.
- The types of Opportunity Zones capturing investors’ interest right now and why.
- How crypto and real estate can work together in an Opportunity Zones investment strategy.
- The benefits for investors and developer to re-invest their capital gains into dedicated Opportunity Funds.
- How investments in Opportunity Zones fit into estate planning and utilized to maximize benefits.
- The power of Opportunity Zones to generate positive social impact alongside risk-adjusted returns.
Featured On This Episode
Industry Spotlight: OZPros
OZPros helps commercial real estate companies create their own OZ Funds, and advises investors with significant capital gains tax exposure on how to make investments that reduce their tax burden.
Learn More About OZPros
- Visit OZPros.com
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to another exciting episode of The Opportunity Zones Podcast, the weekly show where we interview Opportunity Zones professionals and experts from fund managers to tax advisers from real estate developers to venture capitalists. If it impacts Opportunity Zones or the Opportunity Funds industry, we cover it here on The Opportunity Zones Podcast. Welcome to The Opportunity Zones Podcast, I’m your host, Jimmy Atkinson. And I’m joined today live here at the Novogradac Fall 2021 Opportunity Zone Conference by my good friend and business partner, Mr. Ashley Tison. Ashley, how are you doing today?
Ashley: Jimmy, I am fantastic. Thank you, again, for allowing me to be a guest on your podcast. And thank you for coming to the Opportunity Zone Conference, the Novogradac conference here. It’s been a great event thus far, I’m actually really excited about how many people are here, and to hear about the state of the Opportunity Zone world, to get updates from the folks that are in the know, and to see what’s just going on globally within the Opportunity Zone scene.
Jimmy: Yeah, it’s a good event here so far. We’re in downtown Cleveland, Ohio, for the next couple of days here. And I just looked up on the map earlier this morning at breakfast and yes, we are in an Opportunity Zone, actually. It looks like most of the downtown Cleveland, Ohio area is in an Opportunity Zone. And we had the director of the Economic Development Department at the state of Ohio give the keynote address this morning.
Ashley: She was awesome. She’s awesome.
Jimmy: Ohio is doing a lot to generate a lot of interest and investor interest in their Opportunity Zones here locally, not just in Cleveland, but throughout the state of Ohio.
Ashley: What’s really impressive is what they’re doing with the extra 10% tax credit, and with how much resources and how many resources they’ve allocated into really growing their Opportunity Zone program. And it’s been really cool to see that that is actually starting to fruit. And in an inner-city Opportunity Zones, and kind of a, you know, in the middle of the country state is now one of the top attractants of Opportunity Zones capital in the United States. And so, I think that that’s definitely attributable to them getting really proactive and really excited about Opportunity Zones and coupling it in with some state incentives and some state dollars and resources and really making it part of their aggregate economic development strategy. So, it’s cool to see that it’s paying off for them.
Jimmy: Absolutely, Ashley. You know, it’s interesting, the top two states for attracting OZ equity so far, at least according to some initial research and some initial data collection are California and New York, which interestingly enough, don’t conform with the federal tax incentive. New York actually just recently decoupled. Ohio is going completely the opposite direction. They’re all in on OZs, and I believe she said that Ohio is number six in the country for attracting OZ dollars to their state, which is fairly impressive. And yeah, they are pulling out all the stops for Opportunity Zones.
Ashley: Which is really impressive because you don’t typically associate Ohio with being this economic development engine, right? When you’re thinking about people where they’re moving to and where they’re moving from, you know, in my mind, I’m not thinking okay, yeah, there’s this huge mass infill of folks that are coming to the state of Ohio. But that’s not the case as it relates to Opportunity Zones. And I think that that’s one of the reasons why they’re seeing this much progress and seeing as much results as they are, is because they’ve gotten really aggressive on promoting the Opportunity Zones, and then adding some extra juice to them in order to be able to attract capital.
Jimmy: Yeah, so we’re excited about being here in Cleveland. We’re excited about being at the Novogradac conference, and we’re excited about Ohio. But let’s zoom out now, let’s talk nationally now.
Jimmy: And the focus of today’s episode, I wanted to talk with you about a concept that we came up with last night at dinner, actually, which is Opportunity Zones as being the quintessential hedge, which is the title of today’s podcast episode. Ashley, explain what you mean by that.
Ashley: Well, so there’s kind of two prongs there. So, I regularly talk with people on these strategy calls and I love talking to people from across the country. They can log in, and they set a time that works for them, jump on a strategy call, and we literally talk about anything that they want. But a lot of times when we’re doing that we’re talking through updates, we’re talking through how the program works, but we’re also walking through, okay, does this really make sense in light of the potential increase in taxes? And so I walk through that analysis with folks all the time. And that’s one of the things that we were talking about here at the show, Jimmy, is that even though taxes are definitely gonna go up, and I think that everybody else thinks that as well.
Jimmy: It sure looks that way, right?
Ashley: Yeah, absolutely. And then more than likely, when the taxes come due in 2026, and you have to pay those in 2027, they’re going to be higher than the 20% that they’re at right now. So, the analysis on that though is that even though they’re going to be higher between having the ability to be able to defer paying those taxes, and then ultimately the step-up in basis to fair market value on the back end of your new investment, that it more than offsets any potential increase in the taxes between now and 2026.
We also talked about that there’s a very real likelihood that there could be a movement back down in taxes between now and then as well. And so, it becomes a hedge, the quintessential hedge about how you can mitigate having to pay the taxes now instead, and pay them later so that you, number one, get to play with the government’s money, you get to invest that into your new project. And if you make a reasonable rate of return on that investment, that return is gonna pay the taxes when you go to pay them in 2027 anyhow. And then the really big piece, though, is that 10 years step-up in basis to fair market value, because that becomes the quintessential hedge for any kind of tax increases because it eliminates the taxes. And not only does it eliminate your capital gains taxes, but it also eliminates your depreciation recapture, which is a really powerful piece of this.
Jimmy: I refer to that as the fourth or hidden benefit of the Opportunity Zone tax incentive. The first three being the deferral, the reduction, and the elimination. And then I have to remind people, hey, also depreciation recapture elimination. Absolutely right, Ashley?
Ashley: Absolutely. It’s like a little squirrel, you know, that’s hiding in the…the squirrel from “Christmas Vacation” that was an added benefit that Clark Griswold got when he cut that tree down, right?
Jimmy: Exactly. That’s a good reference there. So, one thing that I hear about or one concern that I hear about from some potential investors, taxpayers who are looking to defer capital gains in Opportunity Zones is the point that you just brought up, which is, hey, well wait a second, I can lock in the 23.8% rate today, if I roll over my gain into an Opportunity Zone fund, I don’t know what I’m gonna be paying in 2026. That uncertainty gives them pause. But your point is, and I think what we were discussing at dinner last night we’re discussing now is, well, what else are you gonna do with that gain? Where else are you going to put it, because at some point, you may need to pull it out again, and where else you’re gonna find some sort of investment vehicle where you get to pull it out tax-free?
Ashley: Exactly right. So, by very definition, if you move out of an asset now to go ahead and pay the taxes, you’re probably going to put that into a taxable investment. And so, then when you go to pull that out next down the road, you’re gonna pay taxes on that one at the new amount. And so, this allows people to be able to pull the money out now, put it into a vehicle that has the potential to become tax-free down the road. And it also gives time, and that’s the key. So, once again, this kind of comes into that quintessential hedge because it gives you time to figure out alternative strategies. It gives you time to find solar deals that you can invest in and get investment tax credits for that, it gives you time to do some gifting strategies. And it also gets into what I think is the second quintessential hedge, which is how you can utilize this inside of your estate plan, and utilize this for part of a hedge on estate taxes as well.
Jimmy: So, go into that in more detail. What do you mean by that? What’s happening with the estate taxes?
Ashley: So, in addition to the plan in the current kind of tax changes, looking to increase the amount of the capital gains rate, they’re also looking to reduce the lifetime exemption amount. So, inside of the estate tax, right now, there is a lifetime exemption amount that if you are under $11.7 million as an individual or $23.4 million as a couple and your estate is under that amount, then you don’t effectively pay any estate taxes. That’s your exemption amount. But that amount is going to come down. And we don’t know what it’s gonna come down to.
Jimmy: But it may come down significantly.
Ashley: It may come down significantly to probably realistically around $5 million apiece, maybe as much as $5 million per couple. And so all of a sudden, you know, from right now there’s probably 1% of estates that might be subject to estate tax, but that could go up significantly if it comes down to $5 million. And so, that exemption amount coming down is significant relative to now substantial amounts of people’s estate being subject to tax.
Jimmy: Right. Another way I like to look at it as a hedge, so we’ve talked about it as a hedge against uncertain tax rates, but likely tax rates going up. We’ve talked about it as a hedge against changes to estate taxes. I like to look at it as a hedge against your current portfolio allocation. Especially if you’re a more traditional assets type of investor, maybe you’ve got just like a traditional 60/40 investment portfolio, right? This gives you a chance to diversify into some alternative assets into some real estate.
Jimmy: It gives you an incentive to do that. I’ve seen a lot of investors like that, who don’t really have a lot of real estate experience moving some gains out of the equities market, out of the bond market, which are, I mean, the equities markets had a huge run-up over the last few years, right?
Ashley: It’s going crazy. Yes.
Jimmy: This gives them a chance to take some off the table and roll it into something with some huge tax advantages and get some further asset class diversification into real estate.
Ashley: well, also Jimmy, I mean, there’s a whole realm of crypto gains that’s out there too. So, we’ve got gains in the stock market but then there’s this huge amount of crypto gains because of the influx of capital into that industry, that now it’s a play where people have massive pinup gains inside of that. And it becomes a hedge for them to be able to remove some of their gains out of the crypto world, put them into more stable and to more kind of traditional assets like real estate, like operating businesses, that kind of thing but to do so in a tax-efficient manner. I do wanna go back to that to the issue about how this is a hedge for the estate tax as well, though. So, inside of that lifetime exemption amount, if that lifetime exemption amount comes down to let’s say that it’s $5 million apiece, the reason why Opportunity Zones are a great hedge against that is because when you put your money into a qualified Opportunity Fund, your estate, when you die, will step into your shoes as a taxpayer. So, if you’re five years into your 10-year hold, as soon as that qualified Opportunity Fund turns 10 years old, then your estate now is not paying any taxes on the growth of that asset.
And so, if you had $1 million worth of appreciated assets, you could drop, or let’s say $5 million worth of appreciated assets, you could put all $5 million of that into a fund. And so, you’re now covered relative to your exemption amount. And then as that grows, it’s gonna come out tax-free. And so, the only thing that’s gonna count against your estate is the original $5 million that went into the fund. And so, it becomes a great hedge against that exemption amount coming down. And so, it’s really significant and it’s a way to really juice up your estate planning. And I’m happy to discuss that in more detail with folks on strategy calls. I regularly go into that, about how we can work with folks, professionals in order to get them to open their eyes to the horizon of Opportunity Zone benefits out there.
Jimmy: Fantastic. Any other types of hedges we need to discuss or should we move on to the second topic of discussion on today’s podcast episode?
Ashley: Well, you know, I also wanna say that it’s, you know, it can be a hedge against the uncertainty and, you know, that kind of thing relative to what’s happening in a built-up stock market. But I think we already covered that.
Jimmy: Right on. So, the other topic I wanna talk with you about today was deadlines.
Ashley: There we go.
Jimmy: Right. So, we’re recording this in, what are we? Mid to late October of 2021. So, we’re about, I don’t know, 11 or 12 weeks out from the end of the year. There’s a big deadline coming up at the end of this year, the 10% basis step-up benefit expires. Explain that, what that means exactly. And what other deadlines should investors and fund sponsors be aware of?
Ashley: So, when they originally drafted the Opportunity Zone legislation, they tied all of the deadlines to the culmination of the tax cut and Jobs Act into the sunset of that. And that sunset is December 31st of 2026. And so, they then back that up to say, okay, in order to get investor dollars off of the sidelines, and in order to encourage them to get into the game, they put these kind of capricious deadlines in there to say, “Okay, if you’re in for seven years, you get a 15% step-up in basis when you go to pay the taxes,” which basically reduces your tax bill by 15%. That was seven years that you had to hold prior to December 31st, 2026. So, you had to be invested by December 31st, 2019.
Jimmy: And that was a way to really incentivize early adopters, correct?
Jimmy: Hey, if you get in this early, we don’t even have the regs finalized yet. But if you get in early and start pumping some money into this thing, we’re gonna give you the 15% basis step-up.
Ashley: Correct. And it also, I mean, I think that they very ingeniously created these deadlines in order to get capital to move because otherwise, people would be like, “Ah, I’m gonna wait and see on this Opportunity Zone thing.” But it was actually really effective because at the end of 2019, we saw a massive influx of people setting up funds and setting up Opportunity Zone businesses. And we were not quite overwhelmed, but there was really a whole lot of interest in it.
Jimmy: And now at the end of this year, the second step-up in basis benefit is expiring. That’s the 10% basis step-up, you have to achieve a five-year holding period prior to the end of 2026 in order to take advantage of that. So essentially, you do the math, back it up five years, December 31st, 2021 this year is the last possible date to achieve that.
Ashley: That’s correct. And so, we saw a massive influx in 2019 and it was only 5%. This is 10%. So, this is actually significant money, especially if you’re talking about taxes going up. This once again becomes another hedge, right? against that tax is going up, because you’re gonna have a 10% built-in reduction if you’re invested by December 31st, 2021. And so, I think that it’s substantial for people and I think that people are really gonna want to, if they’re thinking about taking a gain, if they’re thinking about doing a deal, they’ve should really, really look at doing it before December 31st, 2021.
Jimmy: But I would say, I would caveat that by saying even if they miss out, and if the calendar does flip to 2022, and they haven’t made a move yet, it’s still beyond the end of this year, it’s still gonna be advantageous in most cases to at least consider Qualified Opportunity Fund investing.
Ashley: Absolutely. And they’ve got all the way up until December 31st, 2026 to invest. And the great part about that…
Jimmy: Wait, hang on now, they actually have beyond that, right? So, December 31st, 2026 is the last date you could recognize a gain, you then have another 180 days beyond that…
Ashley: To invest, correct.
Jimmy: To invest that gain. And in fact, if the gain is recognized through a partnership, Schedule K-1, you can…
Ashley: You can elect September 11th or somewhere around that.
Jimmy: You can elect March 15th, 2027 as the start date of the 180-day clock. So, that actually takes you all the way toward mid-September 2027.
Ashley: See, you know, Jimmy, I tell you what, the student has become the teacher here, right?
Jimmy: But go on.
Ashley: Yeah, absolutely. But those details are key because it goes into the deadlines here. And the thing about it is, is that even if you miss out on the 10%, the value of that back in tax removal, and the step-up in basis to fair market value is so significant that it makes the 10% seem like a rounding error in comparison. Very similarly, when you really run the analysis and you look at the math on any potential increase in capital gains taxes between now and December 31st, 2026, it makes those kind of inconsequential relative to the benefit of the back in step-up in basis to fair market value.
Jimmy: Yeah, I kind of feel like the 10% basis step-up, that benefit is kind of just the cherry on top of the sundae.
Ashley: Yeah, correct.
Jimmy: It’s nice to have.
Jimmy: But you ordered that sundae for the ice cream in the hot fudge.
Ashley: Exactly right. And I’m a big fan of even some rocky road inside of that sundae.
Jimmy: Okay. Now, are there any other key deadlines that you’d like to hit upon right now?
Ashley: Well, I think that the key piece is that inside of that December 31st, 2026, that if you back up from that, because there’s lots of stuff that can happen between now and then. And that typically in the transactional world, we would identify Halloween. That if you wanted to get a deal done before the end of the year, that you really needed to have that deal kind of in the works and heading towards closing by Halloween. Because invariably, with the holidays and everything else like that stuff just creeps. And so…
Jimmy: So, don’t wait until December 31st.
Ashley: Exactly right. And there’s actually some real reasons for that. You need to have your funds set up, it needs to have a bank account. And then you actually have to drop the fund money into the fund bank account by December 31st in order for to get the 10% step up. And so, backing that up, it takes a couple of days to get a bank account established once you have an EIN. And the IRS last year, cut off the EIN applications, like, on Christmas Eve.
Jimmy: And the year before too.
Ashley: The year before they did the same thing. So, in 2019, we were scrambling trying to get funds set up for folks, and we couldn’t get EINs for them. And so that’s why these deadlines are moving back every year. And we’re really trying to get the information out to folks, hey, listen, if you’re thinking about doing this, let’s get on the stick, let’s get it moving and let’s make it happen.
Jimmy: Right on, Ashley. So, those are some key deadlines to consider if you wanna take advantage of this quintessential hedge.
Ashley: That’s right.
Jimmy: Okay, so we mentioned that the IRS shuts down the Employer Identification Number application, sometimes toward the end of the year, maybe a week or so before.
Ashley: That’s correct.
Jimmy: What type of solution do you have for those people who come in with a deal that they wanna structure in the last week of the year? And are they completely out of luck at that point or what?
Ashley: Yeah, that’s a great question, Jimmy. I really appreciate that. So, invariably, I’ll get a strategy call on New Year’s Eve at 3 p.m., right? I’m getting ready to, like, I’m putting my tux on to go to the party, and somebody is calling in, “Man, I’ve got $5 million of gain and I’ve got to get it into a fund between now and midnight.” And I tell them, “Lucky for you, we establish these things called shelf funds.” So, we have a number of Qualified Opportunity Funds that we set up and we have entities that are set up, and we kind of choose generic names. So, we’ve got the Thunder QOF, we’ve got the Rain QOF, I think we’ve got Uncommon QOF and just kind of general names like that. So that way if people want to change them later on they can. But each one of those shelf funds is not only an established entity that’s got its own EIN but they also have a bank account. And so, if somebody calls me and they need to make a wire transfer, and they need to do it quickly, we’ve got these shelf funds available to where I’d send them wiring instructions, and they wire the money into the account and it’s theirs from the get-go. And we assign the aggregate 99% interest of that shelf fund to those folks so that they can then have their own entity, their own shelf fund going forward.
Jimmy: That’s a great solution. Really clever there. I’m glad you came up with that idea. I like that a lot. What about in the last few minutes we have here, I wanna hear about OZPros, how many strategy calls have you done over the last couple of years since we set up OZPros? And also, maybe could you give an example or two of some of the more interesting deals that you’ve seen?
Ashley: Yeah, absolutely. So, it’s been a great run, Jimmy. And when we originally started this thing, you know, we started this as part of our passion to democratize access to Opportunity Zones. And so, we set up the do-it-yourself forms and that was a little bit of an interesting run because a lot of times those would require more time on our end, than actual doing it for people. So, we now just do done for you services and through that, the strategy call process is kind of a quintessential part of that. Not the quintessential hedge, but a quintessential part of getting your deal in the works and making it happen. And I’ve done almost 600 of these strategy calls now, Jimmy, which has been awesome. I get to talk to people from all over the country with all kinds of deals and they’re all over the board. And out of those 600 strategy calls, I think we’ve set up more than 500 entities now at this point. And so, it’s been a really great run and it’s been really fun, being able to interact with folks, get to know them, become a part of what they’re doing. And then, as part of that, too, we’re actually helping folks with compliance now too.
So, it’s kind of a real cool product that we’re rolling out right now called the OZ Bootcamp. And we’re doing that inside of the OZworks Group community that we set up with Chris. And it’s gonna be an opportunity for people to jump in on a weekly call, where we’re gonna answer compliance questions, we’re gonna answer questions about their stuff. And it’s a way for us to do this in mass so that people can learn from other folks’ questions, and that we can go through and really hammer out how you actually do Opportunity Zones. So, we’re looking forward to rolling that out here. And I think the first one of those is gonna be around sometime in November.
Jimmy: That’ll be great. Yeah, I’m all about providing additional education for all sorts of Opportunity Zone stakeholders, whether they’re fund issuers or deal sponsors or tax or legal professionals. We got a lot of educational resources available at OZPros and at OZworks Group and OpportunityDb as well. So, second part of my question, talk about some of the deals that you’ve seen that are more interesting.
Ashley: Yeah, I apologize about that. I was kind of like a politician on that. You know, you asked me one question, and I gave you an answer to another one that you didn’t even ask, right? So, I’m gonna go not back to not being a politician, and I’m gonna answer your question. So, the deals have been awesome. It’s been kind of across the board with all kinds of real estate deals. So, I’ve got guys that are doing kind of your traditional multifamily stuff, hospitality. We’re seeing a bunch of horizontal hospitality stuff as kind of a response to COVID with tiny houses, and cottages and RV parks and stuff that’s more kind of outdoor hospitality type stuff. We’re also seeing a real big push for integrating those kind of horizontal hospitality assets with food production, and making that a part of the experience that people get to participate in. And so, it solves kind of a two-fold problem. Number one, it’s giving people a place where they can go and they can have a great time. Number two, it’s creating jobs in the community. But then number three, it’s actually producing food for that community and eliminating food deserts and really providing kind of a vehicle for people to come together around food and to unite the tourists with the local population. And so, those have been really cool deals that I’ve seen.
There’s another one that’s kind of a similar agricultural product. It’s actually in Alabama, and it is an autistic community that is situated similarly around an agro hood, they are specifically servicing and they’re providing jobs for folks that are in, kind of, a full-service autistic community. So, they provide housing for them, they provide services for them and then they also provide jobs working on the farm. And one of the farm projects is mast production. So, they’re actually growing that mast timber, which is really cool. And we’ve seen those kind of integrated functions just very similar to that where people are taking lots of these different really cool ideas and businesses that help the economy, they help the environment, and they’re combining all of those to be a community unifier through the Opportunity Zone. So, awesome stuff, Jimmy.
Jimmy: Yeah, fantastic examples of some more eclectic type of Opportunity Zone deals there. That’s tremendous, Ashley. So, for our listeners out there, if you’re interested in learning more about OZPros, or Ashley Tison, you can visit OZPros.com and read a little bit more about what Ashley does and what we do at OZPros. For podcast listeners who might be interested in scheduling a strategy call with Ashley and we’ve got a special deal hooked up for you, you can save a little bit of money if you head over to ozpros.com/podcast. We’ve got a special offer there to schedule a one-hour strategy call with Ashley Tison. That’s for our podcast listeners.
Ashley: And then we’ve also got a promotion if you go and you sign up inside of OZworks Group. And we’re doing some really cool stuff inside of that with different kind of deal analytics and some artificial intelligence software that folks can load up their deal docs into that and they can sign up, they could go to ozworksgroup.com and they can connect with Chris Cooley, and figure out how they can get their deal uploaded into the system there so that it can get evaluated and get some feedback and see if it’ll hunt.
Jimmy: Well, awesome. Ashley, appreciate you joining me today. For our listeners out there, I will as always have show notes on today’s episode available on The Opportunity Zones Database website, you can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Ashley and I discussed on today’s show. Ashley, it’s been a pleasure. Let’s enjoy the rest of our time here in Cleveland.
Ashley: Absolutely, Jimmy. Once again, thanks for allowing me to be a guest and thanks for the great run. It’s been fun.