Opportunity Zones and Capital Gains Taxes

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bingo1980
Posts: 12
Joined: Sun Jun 21, 2015 8:15 am

Opportunity Zones and Capital Gains Taxes

Post by bingo1980 »

I have a tax liability of about $70k for 2021 based on long-term capital gains and understand that opportunity zone investing may be a reasonable consideration. An opportunity has arisen to invest through the "Clarion Ventures Qualified Opportunity Zone Partners" or through a "CIM Opportunity Zone" fund. This is a brand new area for me and my knowledge is limited, so any help is appreciated. My questions are:

(1) In general, is it wise to invest in this area because of my capital gains tax liability?
(2) Are there other/better avenues for this tax situation, or does opportunity zone investing truly represent the most attractive option?
(3) Does anyone have knowledge of these - Clarion or CIM? Are they trustworthy? Do they have a reliable track record? Are their fees excessive?
(4) I am struggling to identify the risks (and rewards) of this investment. I understand that my investment is tied up for 10 years. What are other drawbacks or risks I should be aware of?
(5) If I go for this, am I tying performance too much to investing in one fund/deal? Is there a better way for me to diversify, perhaps through a REIT or other mechanism?

Thank you very much for any assistance.
All The Light
Posts: 1
Joined: Wed Nov 24, 2021 11:21 pm

Re: Opportunity Zones and Capital Gains Taxes

Post by All The Light »

I'm familiar with both of these funds and Qualified Opportunity Zone (QOZ) funds in general. They can provide an attractive opportunity for investors with cap gains, but they don't come without their unique challenges...mostly centered around illiquidity.

(1) Is it wise can only be answered by you and your life situation. Investing in one of these funds will require you to determine if you have the tolerance to take on decade long illiquidity and on-going work such as K1s and potential filing extensions. On one hand you can pay the tax bill today and move on, or you can go through the hoops to gain what can be nice tax benefits.

(2) This is a pretty unique tax solution, with nothing else comparable to it. Unless you can tax harvest (which very few people have tax losses in this bull market), the only other option is pay the tax today.

(3) Both of these fund managers are trustworthy, with decades of experience in real estate investments and billions in AUM. Their fees are not excessive for Private Capital funds (1.5% managment fee).

(4) There are three main benefits of utilizing QOZ Funds: (1) - You get to defer your tax liability you created today for 5 years (you will have to pay it on your 2026 tax bill). (2) If you invest prior to year end (12/31/2021), you get a 10% step-up in your cost basis when you pay in 2026. Invest in 2022, and this benefit is no longer available. (3) This is the biggest benefit if you stay invested for >10 years, all of the capital gains resulting from your QOZ investment are tax-free. Assume your investment increases 2.5x, you don't pay any capital gains on those gains. This can be a substantial tax benefit.
The risks are mostly around illiquidity (although CIM offers liquidity in year 5), and potential for some of the underlying investments to underperform.

(5) This depends partially on what the rest of your portfolio allocation looks like. If you're properly diversified and this investment only makes up 10% or less of your total investable assets, I don't think you're taking on too much concentration risk. The fund will be diversified in various real estate sectors, ranging from multi-family to solar fields, mixed with some retail/office.

I hope this helps with your decision!! I think it ultimately comes down to whether you are willing/able to endure the illiquidity required to get all of the benefits.

~All The Light~
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Alto Astral
Posts: 874
Joined: Thu Oct 08, 2009 10:47 am

Re: Opportunity Zones and Capital Gains Taxes

Post by Alto Astral »

I believe your goal is to defer the capital gains taxes? I read the IRS website on Opportunity Zones and they mention you have 180 days to invest your gains. While you get the benefit of tax deferral on the gain, I don't see these funds as risk free. It seems prudent to pay the tax, assuming its LTCG, than risk the gains altogether in a risky endeavor. Especially if you don't have prior experience on it. I've not come across this in the past.
financeguy88
Posts: 87
Joined: Thu Feb 23, 2017 3:58 pm

Re: Opportunity Zones and Capital Gains Taxes

Post by financeguy88 »

bingo1980 wrote: Wed Nov 24, 2021 11:09 pm I have a tax liability of about $70k for 2021 based on long-term capital gains and understand that opportunity zone investing may be a reasonable consideration. An opportunity has arisen to invest through the "Clarion Ventures Qualified Opportunity Zone Partners" or through a "CIM Opportunity Zone" fund. This is a brand new area for me and my knowledge is limited, so any help is appreciated. My questions are:

(1) In general, is it wise to invest in this area because of my capital gains tax liability?
(2) Are there other/better avenues for this tax situation, or does opportunity zone investing truly represent the most attractive option?
(3) Does anyone have knowledge of these - Clarion or CIM? Are they trustworthy? Do they have a reliable track record? Are their fees excessive?
(4) I am struggling to identify the risks (and rewards) of this investment. I understand that my investment is tied up for 10 years. What are other drawbacks or risks I should be aware of?
(5) If I go for this, am I tying performance too much to investing in one fund/deal? Is there a better way for me to diversify, perhaps through a REIT or other mechanism?

Thank you very much for any assistance.
I have a lot of experience investing QOZ's and a fair amount of experience in real estate investing. My advice would be to not do it unless you have experience investing in real estate funds and ability / resources to do diligence on the fund and the opportunity.

If you run the math on a spreadsheet, the tax savings is really just a nice "kicker" to the overall return on an already good investment and not a reason to invest on its own.

In addition, there are a lot of operators that are taking advantage of the QOZ rush to raise money for dubious projects, marking up the land significantly when they contribute it to the fund, or one of a number of other tricks.

Bottom line OP, not worth it unless you really know what you're doing.
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