December 31st, 2021, Last Day To Secure Certain 2021 OZ Benefits
This week is all about how the Fed puts a positive spin on its future plans for fiscal policy. The PPI data released Tuesday showed wholesale price leaped by 0.8% for November and annual inflation for producers running at a hot 9.6% annual rate, a record for this data point going back to November 2010 when it was first measured.
Stripping out prices received for food, energy and trade services, the index still climbed 6.9% over the same period, representing the biggest increase since August 2014. The gauge showed that prices continued to climb as supply chain disruptions and a labor shortage continues to hamper businesses.
The news sent bond yields higher and most stocks lower, with the crowded big-cap tech sector suffering most. And there seems to be some serious financial engineering going on in America’s c-suites. Corporations have been issuing record amounts of debt at 2%-3%, using the proceeds to buy back stock at record rates in an effort to shore up earnings.
According to a recent CNBC article, “CEOs and corporate insiders have sold a record $69 billion in stock in 2021, as looming tax hikes and lofty share prices encourage many to take profits.” The article goes on to state that, as of November 29 “sales by insiders are up 30% from 2020 to $69 billion, and up 79% versus a 10-year average, according to InsiderScore/Verity … . The selling is likely to increase even more as December is often an active month for sales due to tax planning.” (Source: https://www.cnbc.com/2021/12/01/ceos-and-insiders-sell-a-record-69-billion-of-their-stock.html)
Tax planning sure, but how about inflation and capital gains deferment planning? Qualified Opportunity Zone Funds (QOFs) shelter those capital gains from being taxed for 2021 through 2026 while providing opportunity for growing those funds. Time is running out to get most out of the benefits for 2021, as December 31, 2021 represents a hard deadline to qualify for the 10% step-up basis in capital gains invested in a QOF and to receive a full five years of tax deferral. More on this below.
So, it seems that inflation is rising at a record pace, the Fed is behind the curve and the stock market is facing another potential taper tantrum. Commodity inflation ebbs and flows, but wage and salary inflation seem to be more permanent and 2022 is forecast to be a year of substantial labor cost increases.
From a December 7th Washington Post article: “Americans are in line for their biggest wage increase in more than a decade, according to a report released [by the Conference Board], as companies struggle against a tight labor market and high inflation. Businesses are expected to bump up pay by an average of 3.9 percent in 2022 … . That’s the fastest wage growth since 2008.” (Source: https://www.washingtonpost.com/business/2021/12/08/wages-2022-raises-inflation/)
There will likely be some progress on the chaos within the supply chain, but labor costs may continue to move higher as workers demand for pay increases to keep up with inflation. There will be plenty of market gurus crowing “don’t fight the Fed” in the weeks and months ahead as the tapering of QE is pulled forward to be completed by late spring versus late summer.
This scenario may not bode well for corporate profit margins and the year-over-year comparable sales and earnings reports are only going to get more difficult resulting in a stock market that likely gets considerably more-narrow in terms of sectors and stocks that outperform, or perform even at all. FactSet estimates 2022 earnings for the S&P 500 will be $222.20 which implies a forward P/E of 21.10 versus the 10-year average P/E of 15.0.
One alternative to investing in a stock market that is trading at a 28% premium to its historical valuation because of artificially low interest rates and helicopter money, is investing in tangible inflation-sensitive assets class like commercial real estate.
History is not on the side of fighting the Fed in a fully invested stock portfolio, but, in my opinion, is well on the side of income-producing real estate that is indexed to inflation. I believe that at no other time in the past several years has the repositioning of assets looked so timely given the inflation data crossing the tape, more hawkish Fed fiscal policy and demand for high-quality rental units by a labor force that is enjoying strong wage gains in hot job markets.
I want to be clear about the two major tax benefits, noted above, that investors should be aware of between now and December 31, 2021. We’re talking about two weeks left to move on this situation with most RIAs, CPAs, tax attorneys and estate planners trying to wrap up the year before Christmas time.
The first is the five-year deferral of taxes on capital gains realized in 2021. When QOFs first went live in 2019, the set date to realize deferred capital gains taxes was December 31, 2026, and investors had seven years to defer taxes. December 31, 2026 is not a moving goal post. It’s when the government expects to get paid. With that understanding, investors that reinvest their capital gains by December 31, 2021, and hold until 2026, will receive a full 5-year deferral.
The second benefit that expires on December 31, 2021, is the 10% step-up basis for capital gains invested in QOFs. For example, a $100,000 investment made by year-end and held until December 31, 2026, will carry a go-forward cost basis of $110,000, thereby reducing the amount of capital gains tax due when the position is held for 5 years before sold or when taxes are due at the end of 2026. This 10% step-up basis feature declines to 0% on January 1, 2022.
These benefits for investors sitting on capital gains from the sale of stocks, bonds, real estate, a business, collectibles, cryptocurrencies, trademarks, patents, precious metals, planes, boats, livestock, or any other intangible or tangible assets – reinvesting into QOF – is an alternative investment proposition to shelter 100% of those capital gains for the next five years and establish a 10% step-up basis.
Have questions about how Belpointe OZ can provide opportunities for investment appreciation, income and help you or your clients to Defer, Reduce or Eliminate Capital Gains Obligations?
Call or email us and we’ll take the time to answer all of your questions about Belpointe OZ and how reinvesting capital gains in a Qualified Opportunity Zone fund can be utilized to offset an investor’s tax obligation.
You can contact us at 203-883-1944 or IR@belpointeoz.com
Cody Laidlaw
Editor-in-Chief
Belpointe OZ
255 Glenville Road
Greenwich, CT 06831
T: (203) 883-1944
E: IR@belpointeoz.com
Disclosure: Cody H. Laidlaw is the Chief Investor Relations Officer of Belpointe PREP, LLC. Cody is also an investment advisor representative with Seaside Advisory Services, Inc. (d/b/a Seaside Financial & Insurance Services), a SEC registered investment adviser offering advisory accounts and services, and holds a long position in Belpointe PREP, LLC’s Class A units.
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