Qualified Opportunity Zones (QOZs) come up often in financial planning conversations, particularly for clients who have a strong need to mitigate capital gains tax issues. A QOZ is a classic example of one investing tool which delivers the most value as one component of a multifaceted strategy.
A QOZ has four main benefits:
Defer the gain until 2026 tax year.
No capital gains taxes on the new investment if you hold it for 10 years.
You can still accelerate the depreciation on your new purchase, and no recapture on this after the 10-year holding period.
You can invest in real estate and buy and start new businesses in a QOZ.
Let us run through a brief example and break down some of the fundamental challenges with this strategy.
Scenario: Real Estate Sale
Not too long ago, I was working with two investors who were planning to sell a substantial amount of real property. Both investors were concerned with taxes; however, their primary concern was being able to go their own way after the sale. If they were to utilize a 1031 exchange, they would be unable to go their separate ways. This particular case was not ideal because the sale was moving forward quickly and we didn’t have much lead time. Our only option was executing a 1031 exchange; however, we would have to transfer the proceeds after the sale. We determined the best path forward was to move funds first into a 1031 exchange, and then, following the sale, we would transfer some of the funds into a deferred sales trust (DST) to allow the partners to invest without the restrictions of the 1031 exchange. The remaining funds would then be invested into the client’s own Opportunity Zone Fund. There are various situations where it is advantageous to combine vehicles similarly if you understand the tax benefits, the opportunities, the constraints, and the specific way the transaction needs to be executed.
Combining Tax and Investment Strategies
If your client needs a strategy to defer capital gains tax on an appreciating asset, ensure you are familiar with the investment options as well as the tax consequences and know how to combine the two. QOZs are a perfect example of a vehicle that can be utilized in many different ways, typically in conjunction with other strategies. Timing and sequence are critical. Having the CPA and legal skill set at your fingertips is also imperative. Clients should be working with a professional team that understands not only what type of investment is the best fit, but also how to properly structure and execute the transaction.
About Heath
Heath Walters is a strategic tax planning specialist who partners with financial planners to provide behind-the-scenes tax planning expertise for the high-net-worth clients of financial planning firms. With over 20 years of experience as a CPA and Certified Tax Coach, Heath helps financial planning firms set themselves apart to ideal clients through coaching and specialized services that complement traditional wealth management solutions. Heath’s proven process for client acquisition has led to many advisors doubling their book of business in as little as 24 months. Heath has both a bachelor’s degree in accounting and a Master of Science in Accounting from Appalachian State University. When he’s not helping financial planners reach their firm’s goals, you can find him spending time with his wife, Nancy, and their three children, Allie, Brianna, and Cooper, or fishing, grilling, and tackling home remodeling projects. He’s an avid Roll Tide fan as well. To learn more about Heath, connect with him on LinkedIn.
