Opportunity Zone Tax Implications For CPAs, With Kirk Walton

The Tax Cuts and Jobs Act of 2017 contains a unique opportunity for investors to defer and eliminate tax on gains reinvested into a newly created vehicle called a Qualified Opportunity Fund. But what are the advantages to employing an Opportunity Zone investment strategy over other tax deferral techniques? And how do they compare?

Gain a complete understanding of Opportunity Zones and Qualified Opportunity Fund investing in today’s episode, which is a recording of a live webinar conducted in August 2023, co-hosted by Jimmy Atkinson of OpportunityDb and Kirk Walton of GPWM Funds.

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Episode Highlights

  • Why an investor should consider Opportunity Zones.
  • Requirements for Qualified Opportunity Funds.
  • Comparison of OZs with other tax deferral strategies.
  • The most recent interpretations of the law, and the most important aspect of IRS regulations.
  • The purpose for QOFs and Qualified Opportunity Zones, the tax-saving benefits and potential downside to investors, and the requirements entities need to address when creating these funds.

Guests: Kirk Walton, GPWM Funds

About The Opportunity Zones Podcast

Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones industry.

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Show Transcript

Jimmy: Welcome to today’s OpportunityDb webinar. I’m Jimmy Atkinson, founder of OpportunityDb and WealthChannel, and at WealthChannel, we help high-net-worth investors grow their wealth with alternative investment strategies. Today’s webinar is Opportunity Zone tax implications for CPAs. Today’s webinar is sponsored by GPWM Funds, and joining me is Kirk Walton, co-founder and managing partner at GPWM Funds.

Kirk, I’m gonna get to you shortly, but before we officially begin, I have a few announcements I need to read. Yes, today’s webinar is being recorded, and we’re gonna circulate a recording of this webinar to everyone by tomorrow. GPWM Funds is registered with the National Association of State Boards of Accountancy as a sponsor of continuing professional education on the National Registry of CPE sponsors, and as a result, this is an NASBA-approved course. Webinar attendees are eligible to receive one CPE credit hour. No prerequisites or advance preparation is required, so if you are a CPA and you’d like to earn CPE credit, these next few announcements are especially for you. Number one, in order to earn CPE credit, you must attend the entire session, and respond to the poll questions that we’re going to ask randomly throughout the hour. Number two, an evaluation form is going to be provided to those who are seeking CPE credit, to complete. We’re gonna provide you with the link to that evaluation form toward the end of today’s webinar. We’ll also email it around to anyone who may have missed that link when we send it around at the end the webinar here. So, you’ll have a couple of chances to complete that form.

And then finally, number three, a certificate of completion will be provided to you upon completion of the course. Now, if you enjoy today’s webinar, and you wanna learn more about Opportunity Zones, GPWM Funds will be hosting a more in-depth session on August 23rd. We’re gonna provide you with more detail on that toward the end of today’s webinar. Kirk’ll be talking about that. But in the meantime, if you have any questions about Opportunity Zones today, this is your chance. We want this program to be interactive, so if you have any questions for Kirk, or me, about Opportunity Zones, please use the Q&A tool in your Zoom toolbar. Don’t be shy. We want a lot of questions, and we’re gonna save probably about 10 minutes or so toward the end of the hour for some live Q&A.

One final announcement. Before we dive in officially, I need to read our legal disclaimer before we get going. Please note that the contents of this webinar are for general information purposes only, and should not be considered investment advice or tax advice. The presentation does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or any other product or service by OpportunityDb, WealthChannel, or any other third party, regardless of whether such security product or service is referenced in this webinar. As always, please consult with your CPA or investment advisor before making any investment decisions.

Kirk, we did it. Those are all the announcements that I have, so now let’s officially get underway. Again, welcome to today’s webinar, “Opportunity Zone Tax Implications for CPAs.” I’m joined by Kirk Walton, co-founder and managing partner at GPWM Funds. Kirk, how are you doing?

Kirk: I’m doing great, Jimmy. Thanks for that introduction, and all of the legal disclaimers and necessary information. It’s great to be here. I’m super excited to be talking about Opportunity Zones. I’m always excited to talk about Opportunity Zones. And I’m grateful for your time and attendance, for listening in on this. I’m gonna share my screen and start talking through some slides that I’ve prepared that I think will help us get a quick overview. My goal today is gonna…

Jimmy: No, I think that’s…Kirk, I think that’s perfect. I did wanna just break in real quick before you get going. Let’s do our first poll question, as required by NASBA in order to provide the CPE credits, we’re gonna be launching a series of poll questions throughout our presentation today. So, poll question number one, do you have a client currently looking to place a capital gain into a Qualified Opportunity Fund? So, we’ll give everybody a few seconds to answer that question, and we’ve got, let’s see, almost half of the people here in attendance, 47%, said “Yes,” and then the balance says either “No” or “I’m not sure.” So, Kirk, that’s our first poll question.

Kirk: Awesome. Well, especially for those who are considering Opportunity Zones as a tax strategy, this would be very informative, very helpful. I wanted to spend more time on who we are. We’ve got a deep team, and good relationships with lots of developers. We’ve done 15 Opportunity Zone projects, 12 Opportunity Zone funds. We have projects from the State of Washington to Florida, South Carolina, Arizona, Oklahoma, everything across the country. And more importantly, I don’t have enough time to talk about me. We’re here to talk about Opportunity Zones, and the tax legislation that created the Opportunity Zones. Gonna give you a highlight of some of the rules, but as we go through and talk about the rules, I’m also gonna share some tidbits and tricks. You know, I’ve been on a lot of podcasts talking about this, and I was on one last year, and afterwards, the two panelists who do this podcast said, “You know, I thought I knew a lot about Opportunity Zones until we interviewed Kirk Walton,” and the other one said, “Yeah, he’s like the Michael Jordan of Opportunity Zones.” And I was really grateful for that kind of compliment, because, you know, I feel like Michael Jordan was really into the details, and not just knowing the basics of basketball, but he knew the nitty-gritty details. And I’ve found that to be the case with respect to people who think they know a little bit about Opportunity Zones and the tax rules. They can understand some of the basic rules, but until you get into the nitty-gritty details, it’s not as easy to see how these rules can benefit communities and investors for maximum potential, and that’s what we’re about, is maximizing the potential for the investors and the communities of these rules. So, as we talk about rules, we’ll share some tricks on how to maximize, and use them for the maximum benefit.

Anyway, the legislation itself was included in the Tax Cuts and Jobs Act of 2017, which was passed in December of 2017. On its face, the statute didn’t really go anywhere, and people were not doing Opportunity Zones when it was first drafted. There were some limitations that made it impractical. One of the limitations was it required you to put your money to work within six months. The October 2018 proposed regulations gave us the reasonable working capital safe harbor, which allowed for a 30-month window. So, that helped. But still, most people weren’t doing it. Second batch of proposed regulations came out in May of 2019, and the needle went from here to here to here, more favorable for the taxpayer with each iteration of these regulations. And then a full two years after the statute was passed, in December of 2019, we got the final regulations. I didn’t include it on this chart, but there have been a couple of technical corrections and COVID relief extensions and things like that for the regulations. And there has been discussion for potential extension of the tax bill.

Many people know the current legislation is set to expire at the end of 2026. There have been a couple of proposed legislations introduced, and there’ll be more, I suspect, and I don’t really think this is gonna go away at the end of ’26. Even if it does, just two months ago, there was a bill introduced that would basically take the framework of Opportunity Zones and create a new class of Opportunity Zones, and it would extend it through 2032. So, this is around, and it’s gonna stick around. But that’s the basic framework of how we got here. What are the rules and what do they allow us to do? It allows an investor to have a capital gain from just about any capital gain transaction, any dollar amount would be taxed as capital gain on a tax return, is eligible to be deferred into an Opportunity Zone Fund. And if they do that, they pay later, which is my moniker for the gain, instead of being taxed, or triggered now, is instead recognized on December 31st of 2026. There’s a potential to pay less. Now, this is expired, but I mention it because in all of the extension bills that have been proposed, this provision is revived, and I think it will get revived, and it would allow for a 10% or a 15% reduction. So, if you deferred $1 million in capital gains, and this provision is revived, and you are eligible for the 10% discount, instead of having a million in capital gains come back on ’26, only $900,000 in capital gains would come back on your ’26 return. Again, doesn’t apply now, but if there is an extension bill, it’ll be resurrected.

And the biggest deal of what this is about is you don’t pay at all. What do you not pay at all on? There’s a full step-up in basis to the sales price on the date of sale, which is unique in the tax code. To get that, you need to own your Opportunity Zone Fund investment at least 10 years. But there’s no capital gain on the exit. And quite significantly, there’s no depreciation recapture on the exit either, because there’s a full step-up in basis to sale. In addition, you can monetize the real estate holdings inside your Opportunity Zone fund through a debt financed distribution, or a cash-out refi, completely tax-free, assuming the debt’s qualified non-recourse financing, which all of our debt is.

Of note, eligible gain that can go into an Opportunity Zone fund is gain from a sale to an unrelated party. We had this situation where there was a family in Montana, and one brother wanted to buy out the other two siblings from the family ranch. That wouldn’t work as eligible gain, and that was unfortunate. But, so, as long as it’s… And there’s also a 20% related party test in the Opportunity Zone space. So, that’s the basics as it relates to the investor. There is a timeline within which. You’ve got 180 days from the date the gain is triggered to put the dollar amount of gain into an Opportunity Zone Fund. There’s no qualified intermediary required, like with a 1031 exchange. You don’t need to even trace the same dollars. You just have to put any dollars. It doesn’t have to be from the same account. And the 180-day clock is interesting because, if it’s me, Kirk Walton, in my brokerage account, and I sell Tesla stock, and it’s in my name, that starts the 180-day clock. But if I sell, if I am an investor in a partnership, and I get a K-1, or anything, an S corp, or trust, or estate that I get a K-1 from, and it’s a full-calendar-year entity, with the due date for its tax return on March 15th, then my 180-day clock, I’ve got some flexibilities.

And this is really important because, as CPAs, you’re gonna be looking at tax returns. If you’ve got a client who has a K-1 from a transaction from last year, that reports pass-through capital gain, their window to defer that capital gain on last year’s tax return is still open. You could have sold something in January of last year inside a partnership, and your 180-day clock could have started, and at your choice, on the date of that transaction. So, you could have done the Opportunity Zone Fund investment last January, or through basically January to June. You could have also started it on December 31st, and your 180-day clock would have run through January through June of this year. Or, assuming it’s a full calendar year entity, with a March 15th due date, you’ve got 180 days from March 15th, which basically takes you through September 11th, to take advantage of this for that investor.

So, there’s some quirky rules on K-1s. There’s also some quirky rules on installment sales. The 180-day clock can start on the date of the transaction or the date each payment is received. Or you could lump all the payments together on December 31st. So, that’s important to note. It’s still open to people for last year’s tax returns, if they got the gain on a K-1. Now, I’m gonna talk about some of the acronyms and some of the things that you’ll hear talked about in this space. A QOF, or a “QOF,” is the Qualified Opportunity Fund. That’s the entity that was created in the tax code. It’s a quasi-tax-sheltered entity. It’s basically a partnership in almost every case. And that’s the entity into which investors inject cash in an amount equal to the gain that they want to defer, and in exchange for partnership interests in the QOF. By the way, if you over-contribute, it’s possible to get split interests. If you have $800,000 in capital gain and you put $1 million into a QOF, you end up with $800,000 of good QOF interest and $200,000 in other QOF interests that act like any other partnership interest. You don’t get any of these special benefits.

There’s a 10-year hold requirement from the date of the investment into the QOF. This is important. It’s not…the 10-year clock isn’t from the date the QOF acquires an interest in a QOZB, which we’ll talk about in a second, or when the QOZB acquires any actual property. The 10-year is from the date the investor puts the money into the fund. And the exclusion of gain applies to all of the holdings of the QOF, even if the QOF, or the QOZB, has some holdings that are not Opportunity Zone property. The QOF has its own limits. There’s a 5% limit on cash and a 90% asset test. You must have at least 90% in good property, or Qualified Opportunity Zone property. If you don’t meet those tests, there can be some adverse consequences, but we don’t have enough time to go through the ramifications of that. It’s pretty easy to meet the tests as long as you follow the rules and stay in the right areas.

The QOZB is the entity into which the QOF takes the investor cash and drops it down into, typically, it’s a single-purpose entity that owns a real estate project. Technically, you can do, as a Qualified Opportunity Zone Business, an operating business. In practice, almost all of the Opportunity Zone Fund dollars that I’ve seen, and all the Opportunity Zone Funds that I’ve seen, almost all of them are going into a real estate project. There are some who are exploring operating companies or tech startups, and it has its application there as well. This could be any business, basically, that’s in the zone. There’s a couple of excluded industries, like a golf course, a tanning salon, a liquor store, gaming, gambling entity. But in general, it’s very broad, and just about any business in an Opportunity Zone could qualify. But, you know, I come from Silicon Valley and advising venture capitalists and entrepreneurs from Silicon Valley, and I got familiar with the qualified small business stock, Section 1202, Section 1045, really early on in my career, in the ’90s. And that gives people an opportunity for up to $10 million of tax-free gain on a startup. And you don’t have any geographic restrictions, whereas with the Opportunity Zone rules, you gotta operate in a certain location. You got a 10-year hold here, and you have a 5-year hold requirement with the qualified small business stock, and $10 million is a lot of tax-free gains. So, in practice, I’m seeing the Opportunity Zone dollars used to hold real estate, and not for startups and tech startups, and we’re still using qualified small business stock for that.

There’s a reasonable working capital safe harbor down at the QOZB, which is significant because it allows you 30 months, basically, with no testing requirements. So, the timeline starts with the capital gain. There are some quirks on the clock we mentioned. The investor has 180 days to put their dollars into the QOF. Then the QOF has its timeline. It has a test every June 30th and December 31st. It has a timeline to inject that cash down into some good property, which, in practice, is almost always Qualified Opportunity Zone business partnership interest. Some partnership interest from some new special-purpose entity, where the QOF sends cash down, and receives partnership interest in the project-level entity in return.

Then the project-level entity can have 30 months to come up with the spending plan…30 months to spend the money through a written plan, and inject that money into assets that qualify as Qualified Opportunity Zone property. By the way, there’s a, you can even get another 30-month period, with a second round of financing or funding, on the project. So, you can stretch this out for a very long time. The rules, in general, are exceptionally flexible. Once this reasonable working capital safe harbor expires, then there is a 70% test, where they must hold, at the QOZB level, 70% must be Qualified Opportunity Zone property to qualify. If you meet that test, if you got 71%, then 100% of these holdings count for the good property test and the 90% test at the QOF level.

So, what’s good property down below? By the way, the reason you almost always see a two-tier structure, money from investor going into a QOF, and then from the QOF down to a QOZB, is because you got a 70% test, which is easier to satisfy than the 90% test, and this reasonable working capital safe harbor only applies to the QOZB, not the QOF. Technically, the QOF could take the money and go out and buy Qualified Opportunity Zone property, just at a single level, without this two-tier. But in practice, you never see it, and that’s why. Let’s see. So, what’s a Qualified Opportunity Zone property? Almost always, it’s a partnership interest in the QOZB. And then…for the QOF. And then at the QOZB level, it holds tangible and intangible property used in a trade or business, in certain geographic regions that are designated as Opportunity Zones. Let’s see. You can only do this two-tier structure as of now. You can’t have a QOZB that has another subsidiary, unless it’s a wholly-owned subsidiary. That might change with an extension bill.

Let’s see. What is the property, the tangible property? It must be acquired from an unrelated party. Must be used in active trade or business. Can’t do a single-tenant triple net lease. The original use has to begin while owned by the QOZB, or substantial improvement of the property while owned by the QOZB, which is defined as doubling the basis in the building. All right. So, let me give you some examples of this. One, no single-tenant triple net lease. I got pitched a project in California, early on in the Opportunity Zone days, and there was this nice pitch deck, there was a tax opinion letter from a major accounting, or a major law firm. They had a major accounting firm who were doing the auditing, and the project was to build a new building, and it was a single tenant, and it was a triple net lease, and they were raising money as if it was an Opportunity Zone project. And I said, right out of the gate, “That’s not gonna work.” And they pushed back on, “Oh, we’ve got this big law firm in LA that says it’s gonna work,” and I pulled up the regulations, which I link to at the end here, and I showed them, you know, what’s an active trade of business, for Opportunity Zone purposes? And it just says, one of the examples, a single-tenant triple net lease is not an active trade or business.

The next example is a building with three floors where one of them is a triple net tenant, and the other two aren’t, and that is okay. Where the line in between there is, nobody knows. But that’s the guidance from the IRS. So, you can’t do something quite as simple. Passive activities in this space are active. In other words, owning real estate counts as an active trade or business for OZ purposes. That’s interesting. Original use of the property. You know, when you distill what the Opportunity Zone fund does for wealthy investors, is it creates a wrapper within which they can hold their real estate holdings. They’re gonna own real estate anyway. You all have clients, I assume, who are wealthy. I suspect most of your wealthy clients own real estate of some kind. The difference between owning real estate in an Opportunity Zone and outside an Opportunity Zone, the tax ramifications are quite significant in favor of the Opportunity Zone real estate. And so, as long as you can find real estate in an Opportunity Zone that performs on par or close to on par with what your other real estate holdings would do, then the Opportunity Zone has a significant advantage. It’s an uneven playing field.

But, within the real estate spectrum, there are a lot of differences between risk and return profiles of various real estate projects. So, I wanna mention new use, and talk about that. We did a project where we acquired an apartment complex in Charleston, South Carolina, right before it had reached completion. And this is an asset that had never been placed in service. And so, we acquired it, placed it in service. That constituted new use. It was renting out, you know, a few months after we acquired it. Very low risk on the risk spectrum, in terms of we avoided the development risk, the timeline, all of those things, and we were closer to a cash-out refinance date. In fact, we did a cash-out refi, and the investors received about 35% of their money back about two years after we acquired it and burned through the lease-up period and the concessions. So, that’s a pretty safe investment, and you can do that and still qualify as an Opportunity Zone investment.

If there’s a building that’s been vacant five years, any use into that building would constitute a new use. Or you can also do new development. You can buy some piece of dirt or some building, knock it down and build new. That’s gonna give you good asset, for Opportunity Zone purposes. Substantial improvement is where you take an existing building, you allocate basis when you acquire it to the land and the building. In aggregate, you must spend enough to double the basis of the building, or the, you know, the tangible property. You don’t need to double your basis in the land. And if you do that, then it constitutes good property. The purpose, the public policy behind this rule is to not just go buy real estate in an Opportunity Zone. They wanted, Congress wanted investors to buy real estate and do something to improve it, and improve the area. So, build new construction, substantially remodel an existing building, or take an old, vacant building and put it into use, into some new use.

Where are these Opportunity Zones? Oh, my goodness. Opportunity Zones are literally everywhere. I think they cover, I heard they cover about 16% of the surface area of the country. And it’s 11% of all census tracts. And there’s some Opportunity Zones that are deeply distressed areas, and there’s some Opportunity Zones that are not deeply distressed areas, and really have no business, in my opinion, of providing some massive tax benefit, so… But how did we get them? They started with the 2010 census. And the economic data for 2010 census, they ran a screen for basically low income. And 40% of all census tracts were eligible to become Opportunity Zones, based on that original screening. And then, after that, each state was allowed to select roughly 25% of their census tracts, on that list of 40%, and put it almost like a map where you take, “All right, here’s some tracts that are eligible for this, and I’m gonna put the gold OZ star on these and these and these.” And so, that’s how we got them. And the 2020 census has no effect on where the OZs are, or the economic data that now shows some of these census tracts are doing just fine. And that’s something that might change in an extension bill. But as of now, they’re everywhere, and some of them probably shouldn’t be Opportunity Zones, and that might change. Okay, so…

Jimmy: Hey, Kirk, I wanted to break in…

Kirk: Perfect.

Jimmy: …for a minute here, because I wanna fire up our second poll question. I’m launching that right now. We wanna know how would you rate your level of experience with Opportunity Zone Funds on a scale of 1 to 5? Are you a total beginner? Are you highly experienced? Maybe you feel like you’re somewhere in between. So, let’s end this poll now, and share the results. And Kirk, it looks like about a third of the people here would consider themselves total beginners, so that’s great, and more than half of you are, rated yourselves a 1 or a 2. So, we’re glad to help spread some education to folks who might need a little bit getting up to speed, right, Kirk?

Kirk: You know, and that’s consistent with what I see. Even though the Opportunity Zones has been around for a long time, there is still so much uncertainty, that, one of the issues was, in the first two years of its passage, there was a lot of ambiguity, concerns, questions, and the regulations hadn’t been fully evolved, so it didn’t look as attractive. So, if you tuned in to the Opportunity Zone channel, you know, and learned about it during the first 24 months, you don’t really know how the story ended. And like I said, the regulations got more and more favorable for taxpayers as it went on. It was almost like there was a real estate developer in the White House when these regulations were being drafted.

But, you know, so, they are quite favorable for investors, but they also are quite favorable for communities. And, you know, I wanted to show… Let’s see. This. You know, there’s this policy entity, Economic Innovation Group in Washington, D.C., that has been a major proponent of Opportunity Zone tax law, and kind of had the genesis for the idea for this tax law. And they track and do reporting on it. And they mentioned, just through the 2020 reporting years, which is the last tax return data that were available at the time this report was published, that Opportunity Zone investments had reached 3,800 communities, or almost half of the OZ census tracts that could be, you know, eligible for some investment. So, that’s a broad impact. For comparison, it took 18 years for the New Market Tax Credit investment to reach an equivalent number of communities. This truly is the most impactful geographic-based tax incentive in history. It’s a very big deal. But despite it being a very big deal, it is quite common for me to run into people who are tax professionals and experts in their field, real estate developers, investors, investment advisors, who still know very little about it. It truly is just something that is obscure if you haven’t run across it, but so incredibly impactful for the right families, and for the right communities. So, I’m grateful, again, to have this opportunity to share about this, something I’m so passionate about is making such a huge impact in this country.

Here’s another report from EIG, Economic Innovation Group. “The emerging evidence suggests that Opportunity Zones have already achieved a combination of expansive geographic reach, large-scale private investment, and significant economic effects that is unique in the history of U.S. place-based policy.” So, you’re learning about something that’s a big deal. I’m glad you’re here. But, yeah, it’s not unusual to see people newly exposed to this.

Okay. So, that’s a good overview of the basic rules surrounding this. Now I’m gonna talk about how this can work for some clients’ benefit. So, you’re gonna see a lot of sponsors. When you go out there and you wanna take advantage of this tax law, this is how we started, too, is we ran the family office for some venture capitalists and entrepreneurs from Silicon Valley. And we went out, and they had capital gains at the time these regulations were rolling out, and we went out and looked for Opportunity Zone Funds that we could invest in to take advantage of this great new tax incentive. And all of the Opportunity Zone Funds that we looked at were getting the rules wrong. They weren’t maximizing the value for the investors. And so, I wanna point out some of the ways to utilize these rules for maximum benefit here, as you consider which Opportunity Zone Funds to go invest in for your investors. And these are just some highlights of some things to look at. Background of the sponsors, and the fee structure. Is it two-tiered waterfall, crystallization event? So, I’ll talk about that in a second in more detail.

The duration is a very big deal. Ten years, or longer than 10 years? Ability to reinvest cash flows, also I consider a big deal. What type of projects are they doing? It really is all about the projects. You know, the Opportunity Zone tax incentives won’t make a bad project good, but it can make a good project enormously impactful. And then there’s some state tax considerations. Forty-five of the states conform to the federal, or don’t have a state income tax. So, there’s 45 good states. There’s a few bad states, notably New York and California, where they do not recognize these, the federal tax rules here. Let me talk about the impact of 10 years versus a long-term hold. Almost, to this day, almost every Opportunity Zone Fund out there is targeting a 10-year hold requirement. But the maximum hold requirement is through the end of 2047. The logic that applies now, and every presentation I’ve seen has some slide like this, where they have these two columns, and here’s what happens if you take your $10 million in capital gain and you pay your 30% in tax, 23.8% federal, and then assume about a 6% state, so you’re paying about 30% tax. You got $10 million gain, you got $7 million to invest somewhere, you drop that $7 million somewhere. If it grows at, I don’t know, 8% a year, you know, you’re getting $560 grand in growth the first year, because it’s 8% of $7 million, and then so on and so on and so on. And then 10 years later, you cash out and sell.

I’ve done the math, and, you know, if you did that, and grew it literally at 8% for 10 years and then cashed out, and then you compare that with somebody who did an Opportunity Zone Fund, had the same $10 million in gain, dropped the $10 million in an Opportunity Zone Fund, had the Opportunity Zone Fund grow at 8%, well it’s getting $800 grand in the first year because it’s, you know, 8% of $10 million. So, it’s at the same percentage, but a larger base, and even if you take money out in early 2027, for the taxes, and keep it growing inside the Opportunity Zone Fund at 8% for 10 years, and then cash out and don’t pay any tax, the difference is enormous. It adds almost 5% a year to the net after-tax return if you’re getting 8% or 10% a year nominal return. And that’s just through the first decade. And so, you’ll see that, and that’s the logic, explains why you should do an Opportunity Zone Fund.

But, in reality, the same logic would apply at the date that is 10 years from now. And it’s this, you know, if you run that same logic another 10 years, the second decade is almost twice as impactful as the first decade. It’s a logarithmic curve, and it gets better and better and better. So, why get off the ride at just 10 years if you don’t need to? Remember, you can monetize real estate assets inside an Opportunity Zone Fund with a cash-out refinance. And it can return money tax-free. You don’t even have to wait 10 years for that. You can do a cash-out refi as soon as the project is cash flowing and is eligible for that. If it’s after 24 months, it’s presumed to be, you know, a good refi. Even if it’s before 24 months, there’s a presumption it’s not… It’s a presumption of returning your own money if it’s within 24 months. But you can rebut that presumption if you happen to have the unique project that, within 24 months, is suddenly built-up, new leased-up, stabilized, and can cash-out refi. So, you can do a cash-out refi whenever the project can support that, and you can monetize the asset that way tax-free. You don’t need to sell it. The ability to continue depreciation deductions longer than 10 years is huge, and is money that is left on the table. Those depreciation deductions from years 10 through years 20, whatever, has monetary value, for everybody. They can either use those passive losses now, or when they have more passive income later, or when they sell the asset, it’s freed up.

So, the longer hold times has definite value from the depreciation we capture, and you may get additional tax-free appreciation. How many of you have… You know, ask yourself this question. How many of you have known someone who’s owned real estate for more than 20 years? And then, did they have a terrible exit, or a very, very significant gain on the exit? That’s what this does, is it allows you to have 20 years of real estate ownership, without, you know, tax on the exit. And I use the analogy of the Roth IRA. You know, you can cash out completely tax-free from your Roth IRA in five years, and at age 59 1/2. But who starts a Roth IRA with the game plan to cash out in five years and at age 59 1/2 completely tax-free? Nobody starts a Roth IRA with that game plan. Why? Because, you know, 5 years of tax-free growth is great, but 10 years is better. And in my space, 10 years of tax-free growth is great, and 10 years of depreciation deductions that I don’t pay depreciation capture on is great. But 20 is better.

By the way, you get basis in, that allows you to take these depreciation deductions, in your own dollars, when they’re included on your ’26 return. And you get basis in qualified non-recourse financing the debt that’s used to construct or improve the project, right away. So, we have projects that are throwing off massive passive losses during the development phase, which is incredibly useful for tax strategy. And those losses are from depreciation deductions that are not subject to recapture. It is truly free money. Let’s see, reinvestment of cash flow. Here’s another thing that all of the Opportunity Zone Funds to this day get wrong. When money comes back from a project, from a cash-our refi, net operating income, sale of a parcel, that money can be distributed out to the investors, or it can also stay within the QOF and be reinvested into other Opportunity Zone projects. So, we had a project in Melbourne, Florida. We bought an old Sears. It came with 14 acres. We’re converting the Sears box store into self-storage, and we sold off a chunk of the parking lot which we didn’t need. We didn’t need a 14-acre parking lot. And we sold that off. And yeah, that triggered a small capital gain for those investors, but we had enough losses elsewhere that we weren’t worried about that. But we took that money and recovered almost 80% of our total cost, and got that money back, and used that to go acquire a huge tower that was already in existence, that we’re rehabbing.

So, that created two projects out of one. Again, similar to a Roth IRA, how you would reinvest your dividends, rather than sending the dividend checks from stocks in your Roth IRA to your checking account, you reinvest them so you can buy more stocks that appreciate tax-free. That’s another missed opportunity that I see almost every Opportunity Zone Fund doing. Rehab versus new construction. Here’s another trick. A Qualified Improvement Property is eligible for bonus depreciation. Now, QIP is the money spent to improve the interior space of an existing building that is used for commercial purposes. Commercial purposes is a test at the gross revenue level, and as long as 20% of the gross revenue is from a commercial tenant, it’s gonna be deemed to be a commercial project. I might have that backwards. I’m so sorry. I think it’s 80%. Yeah. It’s a 20% test right at the beginning. I’m so sorry. I’m having a brain cramp. But it’s a very easy test to satisfy. So, we have projects that are mixed-use with apartments and commercial. And even on the apartment side of things, the whole space qualifies as QIP. And what that does is it’s eligible for bonus depreciation on the date it’s placed in service. So, all of the improvement costs… Like, we have a project in Reno, Nevada, and it’s this old hotel and casino. And some of the hotel rooms, we’re converting to apartments, but all of the cost of the, most of the budget, is remodeling the interior space of this building.

And so, I’m ending up with QIP and depreciation deductions, also with a cost segregation study, that are in excess of the cash into the property. So, during the development years, we will throw off depreciation deductions and passive losses greater than the capital gain dollars that go in. Why is that useful? Well, in 2026, when that capital gain comes back, if I had an investor who put money in from a real estate sale, my passive losses that I generate during the development phase can come back, we’ll roll forward and roll forward, and then can offset most, and in some cases, all of the capital gain that comes back on the ’26 return. In other words, if you have someone who’s contemplating a 1031 exchange, instead of a 1031 exchange, they could put their money into an Opportunity Zone Fund. And with a 1031 exchange, you have to do the whole enchilada, all of the dollar. And the first dollars you don’t do is presumed to be taxed at the highest rate. With the Opportunity Zone, you just take the gain dollars on top, and your basis you can take out, and give yourself some liquidity. You can take the basis and put it in your checking account tax-free, just the amount of the gain needs to go in, to the Opportunity Zone Fund. With a 1031 exchange, you don’t get new basis in your new assets that you just acquired. With an Opportunity Zone Fund, you do get basis, in your own dollars eventually, and in the bank dollars right away, assuming it’s qualified non-recourse financing.

So, you’re getting deductions right away. And then, in ’26, yeah, the capital gain that you deferred from this potential 1031 exchange transaction, the capital gain you deferred comes back on your ’26 return. But if you fill out the form right, and I’ll show you that in a second, it comes back as the same character, so it comes back as capital gain from a passive activity, which can be offset by passive losses, even the passive losses that those very dollars generated, between now and the end of 2026. So, that’s huge. There’s also massive multi-generational wealth transfer strategies here. It has enormous impacts. It’s the perfect asset for a grant for a trust. If there’s no income in respect of decedent on death, your heirs step right into the shoes, it keeps on growing, there’s no step-up in basis that that, you don’t even want that. The step-up in basis is timed perfectly to the date of sale, whenever that is relative to the date of death.

Here’s something that’s super important, and we’re getting close to the, running out of time. Every investor who has an Opportunity Zone Fund investment must include on their tax returns the form 8997, and you’ll see it here, every year that they own any interest in any Opportunity Zone Fund. And basically, this form’s, part one is how much OZ stuff did you have at the beginning of the year? How much new OZ Qualified Opportunity Fund interest did you acquire during the year? How much…and part three is how many OZ interests did you dispose of during the year? And part four is, okay, how much Opportunity Zone Fund investments you have at the end of the year? And then you take this, and that becomes part one for the next year. So, this is the way the IRS tracks all of this, and makes sure that the investor holds it and continues to hold it throughout the 10-year hold.

There’s this column D here, “Special gain code.” I’ve highlighted it. This is probably the most important…as CPAs, this might be the most important thing in this whole webinar. If you have gained from a real estate transaction or passive activity, you absolutely want to put a B as in bravo in this “Special gain code” column, because that tracks it as gain from a passive activity, and that allows the gain that comes back on your ’26 return to be offset by the passive losses. So, that’s the most important thing, I think, in this webinar.

Let’s see. Oh, there’s potential extra benefits if you get real estate professional status. We don’t have time to go into that. Here’s some extra resources. Jimmy Atkinson’s web pages, our web page. You can find a bunch of other webinars that have been on and things like that there. Here’s a link to one of the proposed bills. I do think you’ll see another one. Here’s the link to EIG’s brief on the impact. Questions?

Jimmy: Kirk, that was awesome. We’ve got 14 minutes…

Kirk: Let’s do … Have we done all of our poll questions?

Jimmy: We have not. I’m gonna get to that in a second. Thanks for reminding me. Kirk, are we making these slides available to the audience?

Kir: Absolutely. I can send these around. Sure.

Jimmy: Okay. Well, I’ve already posted them to our website, so I’m gonna post a link to it right here. I just wanna confirm with you. So, the slide deck link has just been posted in the Zoom chat. Feel free to download that. We’re all gonna email it to everybody, so you’ll have a couple chances to download it. And then let’s fire up that final poll question of the day here. Launching it now. Kirk and his team were just curious. Do you feel comfortable vetting OZ Funds? Yes or no? We’ll give everybody a few seconds to get that one answered. And while you guys are looking at that, I guess I can… I’ll get to some of the questions here, Kirk. We have a ton of questions, so I don’t know if we’re gonna be able to get to all of them.

Kirk: I figured there would be.

Jimmy: But we’ll include Kirk’s email address, and we’ll reach out to you if we don’t get your question answered. First question came in from Murdy. Murdy’s been waiting a while. He was the first question to get asked here. “Can we combine capital gains from different funds to invest into an OZ?”

Kirk: That’s a great question. And yes, we have had investors who have had capital gains from different transactions, multiple transactions, and just do one check for that investment. One you reported on the Schedule D or the Form 8949, the way it’s reported to claim the deferral of gain election, is you report the capital gain event that happened, and then on the next line underneath it, you put deferred…basically, you indicate it was deferred, you write the EIN for the OZ Fund it went into, and you subtract the gain dollars that you deferred, and there’s a special code that goes there. So, that’s how it’s reported to claim the deferral of gain election form, and that has to be on a timely-filed tax return for the year of the capital gain event that you are deferring. But yes, you can combine multiple different capital gains into one check. In fact, the benefits of this are so impactful. We’ve had people who have tried to generate capital gains. You can take your realized gain/loss report from your brokerage firm, and sort it by transactions that triggered a gain, and just circle the ones that had a gain. Like, if you’ve got a million in capital gains and a million in capital losses, you may think you don’t have a capital gain to defer into an OZ fund. But watch this. You can take the million in gains and put it into an OZ Fund. Your million in losses, now you don’t have any capital gains, so you get…you know the rules. You’re all CPAs. You get $3000 this year, $3000 next year, $3000 next year, and it rolls forward, rolls forward, rolls forward. And then, what’s left over is still there when your million in capital gain comes back on your ’26 return. So, those losses are still gonna offset the capital gain, but allowed you to get into real estate that you can own for 20 years, without tax on exit, and without depreciation recapture.

Jimmy: That’s perfect, Kirk. I just wanna share the results of our third poll question there. Looks like close to a 50/50 split there, with folks in the room today feeling comfortable vetting OZ Funds. That was our last poll question. Thanks to everybody who participated. We had a couple questions about improving buildings under an OZ. So, this particular person, Frank, asks, “Hey, I own an office building in an Opportunity Zone. I wanna make substantial improvements, installing a solar power system and EV chargers. Would investing in these improvements qualify?”

Kirk: Great question. It depends on who did the investing in these improvements. The OZ benefits are stackable. In other words, we have a project where we’re getting historic tax credits. We also get, you know, that you can get low-income housing tax credits. You know, you can stack and get extra benefits. You can get the environmental credits, things like that. They’re stackable. In your situation, to get any of these OZ benefits, you gotta go back to the very beginning. If you don’t start with this step and go through each hoop in order, you personally will not get these tax benefits. And it’s quirky that these are the rules, but these are the rules. It starts with a capital gain transaction, in a sale to an unrelated third party. Then, the entity or person who had that capital gain transaction deposits cash into an OZ Fund, in exchange for interest in the OZ Fund. Then, the OZ Fund deposits cash into a QOZB, in exchange for partnership interest in the QOZB. Then, the QOZB acquires property. A building is typically, or land, is typically what we’re seeing. Then, in the hands of the QOZB, the entity is substantially improved or put to new use. And substantial improvements would be to double the basis in the building.

Addition of solar panels would qualify as improving the property, absolutely. But if you already own the building, and the building is in an Opportunity Zone, then the government doesn’t think you deserve these tax benefits, because the public policy behind this tax law was to take the trillions of dollars in unrealized capital gains, and recognize those capital gains, and motivate people to take money out of the stock market and inject it and improve other communities. So, if you already owned it, they don’t think you were motivated to jump through the hoops that they wanted you to jump through. So therefore, you’re not gonna get the benefits.

It’s also tricky if you try to take your existing land and partner up with somebody else. Well, why doesn’t somebody else come in? I’ll still own it. I’ll stay on. I’ll create a partnership, or I’ll contribute my land, or my building, and somebody else will contribute the money, and we’ll go out and improve it. You know, you are not going to get the Opportunity Zone benefits, even though the other people might. Because your partnership interest didn’t come through those hoops of capital gain, dollars in cash, into a QOF. In fact, the regulations even had this. What if I had…what if we got together and our fund bought your property, and now you have a capital gain, and then you contributed your capital gain into our fund? Well, there’s the circularity-of-cash-flow doctrine, that would say your gain is not eligible gain, because under the disguised sales rules, which still apply to all partnership transactions, including Opportunity Zones, under the disguised sales rules, because you put money in within two years, it would be deemed as if you contributed the property into the fund, rather than the cash into the fund, and the hoops are, cash from the investor into a QOF, QOF into the QOZB. So, even in that scenario, you’re not gonna get the benefits.

Why they’re so particular about that is still kind of a mystery, but in general, the public policy was to motivate people to take money off the sidelines, and out of the stock market, and put it into areas. So, your case, your best move is to sell the asset to some random stranger, and go do another Opportunity Zone project right across the street. Because you already own a building in an Opportunity Zone. Your returns are gonna be the same as the guy who has the building across the street. But if you follow these rules and jump through these hoops, your net after-tax returns are going to be substantially better inside an Opportunity Zone Fund, for owning the exact same building, basically. You can have twin towers, one in the zone, one out of the zone. The investment experience of the investors who do jump through those hoops, and do it in the zone, is… It’s an uneven playing field. In fact, the biggest criticism of this program, for those who criticize it, is they consider it to be a gross giveaway to the ultra-wealthy. The biggest criticism is it’s too much benefit to the ultra-wealthy. At the same time, there are communities that are being completely transformed by this benefit. So, anyway. I hope that helps answer your question.

Jimmy: Well, we got time for a couple more questions here. This one is from Zach. Came in early, pretty simple, but I think there might be some nuance to it. “What is the 10-year hold date start? When does that clock start ticking?”

Kirk: This is great question. It starts the date the investor acquires an interest in the Opportunity Zone Fund. So, you know, I mentioned we had a project in Florida, where we sold off a parcel, and another where we did a cash-out refi. Those same investors in the funds took that money and went out and acquired an interest in another OZ project. I could cash out those original OZ funds 10 years after their start date, even though some of the projects were only on six years or five years. And all of the assets could be eligible for the exclusion of gain, because it’s 10 years from the date the investor put their money into the OZ Fund, not how long the OZ Fund owned a particular asset. In fact, you could even have non-OZ assets. I’ve seen people talk about holding crypto, or stocks as part of that 10% slice that you, you know, you can have as non-OZ property. I don’t do anything like that, but I’ve seen people try to game the system, or down at the QOZB level, have the business have 71% of good property, and then have 25% of a stock portfolio owned by this, you know, OZ. All of the stuff is gonna be eligible for the exclusion of gain on the date of sale, assuming the investor holds the partnership interest in the QOF 10 years. Great question.

Jimmy: Now, kind of, I have a follow-up question on that. If you are an LP coming into a large fund with a lot of LPs, and you get your check in on January 1, but then the last investor doesn’t get his check in until December 31, when does the clock start ticking? Start ticking for you on January 1, but the fund might wanna stay open for that last investor, right? Or not open for the last investor, but the fund might not wanna divest until that last investor reaches his or her 10-year hold. Is that right?

Kir: That’s right. For each, in that case, if they sold in, you know, 10 years and 6 months from the first investor, which would be 9 years and 6 months from your last investor, the first investor’s experience would get all the benefits, and the last investor would not. And so, incidentally, that’s why we have multiple OZ Funds, where we will raise capital for, and then close it down at the end of the year, and clone the documents and start another one and another one and another one, so that all the investors are roughly grouped together in that OZ fund, so their 10-year clocks are roughly contemporaneous, you know, with each other. But yeah, you’re gonna wanna wait 10 years from the last investor, if you want those benefits for your investors.

Jimmy: All right. We got three minutes left, Kirk. We got about 20 more questions, so we’re not gonna get to all of them, but we’ll try to get to as many as we can.

Kirk: I’ll mention, we’re gonna do another event next week. We’ll send that out, and we can have a Q&A for as long as you want. But anyway, let’s get to a couple more.

Jimmy: Very good. So, Christy asked, “Is there a difference between fiscal year and calendar year? Kirk mentioned calendar year ending March 31st. Isn’t it still 180 days?”

Kirk: Yeah. So, the rule about… You’re talking about, when does my 180-day clock start for a capital gain that is passed through to an individual or an entity on a K-1? First off, I didn’t mention this earlier, but the entity itself has 180 days, and it could do a Opportunity Zone investment in the name of the entity, at the entity level. But if the entity level doesn’t do it, the individual who receives the K-1, they have 180-day clock, and it starts on one of three dates: The date of the transaction, if they want to, and they know about it, December 31st, the end of the year, or the due date of the tax return, not including extensions, which is March 15th for a full calendar year partnership. I keep saying that because everybody says it’s March 15th if you get a K-1. That’s not true. It’s only true if it’s a full-year entity. I see some things where they shut it down in their final year, where they sell off the business, and they do a short year. And they shut down the entity, and they give them a K-1. Well, if it’s not a full-year entity, the due date for the tax return, it isn’t March 15th anymore. So, it’s whatever the due date of the tax return is, as the start of the 180-day clock, not including extensions. So, for most partnerships, that due date’s gonna be March 15th. Which means you got 180 days, which is through September 11th. It’s not six months. It’s not September 15th. It literally is 180 days, which is around September 11th.

Jimmy: Excellent. Well, we have reached one hour now. It’s 1:00 p.m. Eastern Time, so if you were here for the CPE credit, you’ve done it. You’ve successfully completed your requirements, for the most part. But I do need to get you the link to the evaluation form. So, let me find that and post that in the chat, and then one other notice is that we are gonna post this to our YouTube channel by tomorrow. So, I’m gonna post a link to our YouTube channel right now, and then I also need to get you a link to the evaluation form. Kirk, while I look for that, I don’t know if you have any other last thoughts, or if you wanna talk to people about the upcoming webinar that you’re hosting next week.

Kirk: It’s designed to be an open forum Q&A, just like we’ve been doing here, to give you an opportunity… And of course, you know, my contact info is above my name on the screen. You can see that. Feel free to reach out. Email or call anytime. I love…I’m super passionate about this. I love talking about this. Even if people don’t invest with us, I just love talking about this stuff and helping people make sure they do it right. I really hate to see people overpay on taxes unnecessarily, and this has such a potential impact, for the right investor, for the wealthy. It’s worth investigating for your clients, and getting it right. In fact, the last thing I’ll say, as a best practice tip to you CPAs, is I would include in your cover letter that goes out, early in the tax season cycle, a question about, did you incur a capital gain, and are you interested in looking at an Opportunity Zone Fund investment to defer that capital gain? Because I hate to hear of the story, and I know it’s gonna happen someday, where some CPA calls up a client, “Hey, I know you just sold your business a few months ago. Do you know about, you don’t have to pay tax on it? We could do an Opportunity Zone Fund, invest it?” And then the guy says, “Yeah, but that was six and a half months ago.” “Oh, no. Now you can’t.” You know, like, you want to…

And the same is also true with 1099-B. You’re gonna get the 1099-B. But, you know, if you look at that on April 15th, you only have the last month and a half of the prior year capital gain transactions to defer the gain. You wanna flag those investors that you know have big capital gains, and you wanna put the onus on them, as a best practice tip, to notify you that they wanna do this, to just avoid any potential complaints. “Well, why don’t you tell me about this?” You know? You wanna look at the 1099-Bs early. You wanna be talking to your wealthy investors during the year. “Give me your realized gain/loss report for the year,” and look at stuff that’s happened. Because if you wait till you get the 1099-B, stuff that happened in January to June in your individual name is completely gone. You’re really down to the last couple of months of the year.

Jimmy: Very good. Well, Kirk, we’ve run out of time. We went a few minutes over. I’m gonna cut us off there. I did post Kirk’s email address in the chat. If we didn’t get to your question, feel free to email Kirk. Sorry, Kirk, you’re gonna get spam now, but you’ve got… You want people to…

Kirk: Love it. I love it. I legitimately love it, so bring it on.

Jimmy Yeah, and we’ll try to reach out to you if we didn’t get to your question. Sorry, I guess we probably needed, like, two or three hours to get to everyone’s question today, but, and we’ll send some more information about the webinar that Kirk and his team will be conducting next week.

One more reminder, the recording of this presentation will be put up on the WealthChannel YouTube channel by tomorrow. I’ve posted the link to that in the chat, and the deck. The link to that is in the chat as well. We’ll follow up with an email that contains all of this information a little bit later today. Kirk, this was awesome. We should do it again sometime. What do you say?

Kirk: Sounds great. You know, Jimmy, I forgot to mention you got your Notre Dame hat back there. We got a project in… I forgot to mention, our Notre Dame project’s gonna open in a couple months, and, you know, we bought an old medical office building, flipped it into apartments for student housing, in about 15, 18 months. And, you know, it’s perfect example of an OZ project. So, we’ll talk about that next week.

Jimmy: Sounds great.

Kirk: The kinds of projects you can do. Anyway. Thanks, Jimmy. Great to be here.

Jimmy: Thank you, Kirk. And thank you everybody for attending today. Really appreciate your time and attention. Thank you so much.