We’ve been discussing opportunity zones from the perspective of the investor for a few weeks now. And while opportunity zone investments can potentially provide significant tax benefits for investors, we believe there is also opportunity to be captured by Realtors, CPA’s, and Business Brokers.

Here are 6 approaches you may want to consider when discussing the Qualified Opportunity Zone and Qualified Opportunity Fund (QOF) investment with your clients:

1. Create Opportunity by Highlighting QOF Advantages from a Business Sale

Whether a business owner started their business from the ground up or purchased an existing business and expanded it, upon the sale of the business, capital gains can be significant. For the successful business owner or the wealthy individual with an entrepreneurial tilt, the business may be only one of several ventures. No matter how “passive” their involvement is, that business takes time and attention and distracts from other pursuits.

Despite the distraction, hands-off business owners might be wary of selling a business that requires little active management if it means writing a hefty check to the IRS. If suitable, selling the business and reinvesting the proceeds into a Qualified Opportunity Fund could be the answer. Educate your clients on the tax deferral, tax reduction, and tax-free growth potential of the QOF and see if their attitudes towards a sale change.

2. Extend Tax-Deferral Advantages to Assets other than Real Estate

For most commercial real estate investors, the IRC Section 1031 tax-deferred real estate swap is a familiar tactic when looking to defer paying capital gains taxes on the sale of appreciated investment property. In a 1031 Exchange, the investor can replace the relinquished property with a like-kind replacement property. The replacement property (or properties) can either be directly owned or can be facilitated in a passive investment known as a Delaware Statutory Trust. Either option allows for sale proceeds to be re-invested in real property in order to capture the full capital gains tax deferral.

Investment in a Qualified Opportunity Fund affords investors similar tax-deferral advantages, but with one distinct difference. While 1031 Exchanges only apply to real estate, QOFs allow investors to potentially defer capital gains on almost any type of asset. So, for example, an investor who has large capital gain on the sale of a stock, can defer that capital gain tax by investing in a QOF.

3. Highlight Passive Management Advantages

Similar to the DST, QOF sponsors provide institutional quality professional management services for OZ properties. Remind your clients how beneficial this passive investment can be by relieving them of the time and anxiety expended when responsible for personally managing a property.

4. Introduce how QOFs can help with Estate Planning & Charitable Giving

Many high net worth individuals include charitable giving in estate planning considerations, using their wealth to make an impact in the community while taking advantage of the favorable tax incentives that those gifts can provide. QOFs allow for the tax basis on invested assets to reset to fair market value after a 10-year holding period in the QOF. By eliminating capital gains tax obligations, this can help boost an investor’s net worth and provide the cash needed for those charitable considerations while also realizing short term tax incentives, and positioning heirs to inherit a passive, institutionally managed investment with the potential for tax-free growth.

5. Discuss Why Diversifying with a QOF Might Help During Periods of Market Uncertainty

As of the writing of this article, we are in the midst of the longest running bull market in American history. Beginning in 2009, the current 10-year run has far outstripped the average bull market lifespan of 4.5 years. As markets continue to reach record highs, stock prices continue to climb, and the bull market ages, the savvy investor may begin to plan an exit, knowing that all market runs eventually come to an end. If suitable, the QOF can be a valuable tool in optimizing tax savings while executing such an exit strategy or looking to rebalance a portfolio. As mentioned earlier, capital gains realized in the sale of securities can be reinvested in a QOF to take advantage of the tax deferral, tax reduction, and tax-free growth incentives.

6. Explain How a QOF Can be a Backup for Failed 1031 Exchanges

Every Commercial Broker and Qualified Intermediary has seen countless failed 1031 Exchanges. Whether it’s due to ignorance (“What do you mean I can’t take possession of the sale proceeds?”), lack of preparation (45 days goes by much faster than one might expect), or unforeseen roadblocks to closing, a blown exchange means an unhappy client and a hefty tax bill. While QOF’s may not offer the complete tax deferral of the 1031 exchange, the deferral and other tax incentives they do provide could reduce the sting of a failed exchange. Presenting your client with a backup option to help salvage a blown exchange may just salvage your relationship as well.

For more information, please feel free to contact our team today.

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This is for informational purposes only and is not an offer to buy/sell an investment. There are risks associated with investing in Delaware Statutory Trust (DST) and real estate investment properties including, but not limited to, loss of entire principal, declining market value, tenant vacancies and illiquidity. Diversification does not guarantee profits or guarantee protection against losses. Potential cash flows/returns/appreciation are not guaranteed and could be lower than anticipated. Because investors situations and objectives vary this information is not intended to indicate suitability for any particular investor. This information is not meant to be interpreted as tax or legal advice. Please speak with your legal and tax advisors for guidance regarding your particular situation.

Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Concorde Asset Management, LLC (CAM), an SEC registered investment adviser. Insurance products offered through Concorde Insurance Agency, Inc. (CIA) Fortitude Investment Group is independent of CIS, CAM, and CIA.

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