Make Sure To Ask All The Right Questions About Avoiding A Big Tax Bill On April 18
To paraphrase the old proverb: the road to poor investment returns is paved with good intentions. It’s probably not a stretch to assume that many investors and traders booked their capital gains before December 31. And then most likely, with the full momentum of the “January effect” in motion, rolled all those gains into new stock and ETF purchases as 2022 got underway, only to see those gains roundtrip under the current market selloff.
It’s not the first time the stock market has kneecapped investors following a year where the S&P gained 26.9%, only to give back those gains inside of two months and with tax season just around the corner. It begs the question, do you sell stock during a major market pullback out of concern of further downside risk to pay 2021 taxes, or find other sources, like a short-term loan, to pay your tax bill and look for a more constructive market landscape in which to raise cash.
No doubt, it’s a tough call. But the first thing I think you should do before taking action in any direction is to ask a couple of questions:
- Do you know the entirety of your capital gains liability for 2021?
- Are those realized 2021 capital gains currently active in your portfolio, and at what cost basis?
- Have you spoken to your RIA, CPA, CFA or Tax Attorney about the extent of your overall 2021 tax liability strategy?
- Are you a bull or bear on the market between now and when you have to have ready funds to meet tax deadlines?
For wealthy investors the top tax rate that could apply is 23.8% for long-term capital gains and up to 40.8% for short-term capital gains, in addition to state level taxes which could push the total tax burden up to 37.1% for long-term capital gains and up to 54.1% for short-term capital gains, depending on an investor’s tax bracket and state of residence. With the April 18, 2022 tax filing deadline looming, I think it’s fair to assume, given the recent slide in the market, that an avalanche of extensions will be filed.
But let’s also assume 2022 will not be a year in which the stock market outperforms. Against the backdrop of increasingly tighter Fed policy, the threat of a new economic cold war with Russia and inflationary trends that have not yet shown any signs of reversing, I think this is a pretty reasonable assumption. In this scenario smart money sometimes opts to not play the waiting game and instead aggressively builds cash to fund taxes and have ample dry powder on the sidelines in the event the optics, narrative and headlines don’t change for the better anytime soon.
For RIAs that have client assets with 2021 gains booked, the conversation about how the associated tax burden came about and what to do about it can be stressful. But it doesn’t have to be when you have a viable tax deferral strategy that can offset tax liabilities dollar-for-dollar. Offering a possible solution to the tax burden and preserving AUM can be accomplished by having a discussion about how a Qualified Opportunity Zone Fund (QOF) can be of real value.
Because of the 180-day lookback period built into the regulations that govern QOFs capital gains reinvestment, investors can shelter 2021 capital gains going back to a recognition date of August 29, 2021 as of this writing. This 2021 window closes with each day that April 18 approaches and will completely close by June 28, 2022 on a rolling 180-day basis.
Let’s assume you are faced with a capital gain of $500K. Invest that same $500K capital gain into a QOF within 180 days of August 29, 2021, and there will be no federal (and in many cases state) taxes due on that $500K until you file your 2026 tax return in April of 2027 or you sell the position beforehand. In addition, as a general rule you will not be taxed on any of the appreciation or depreciation you receive on your investment if you hold the investment for 10 years or more, up to December 31, 2047.
This 180-day lookback period to recognize and pair off dollar-for-dollar capital gains with capital gains taxes owed provides for a tax planning tool and what we believe is a compelling incentive to build a rare and unique 2021 tax shelter.
While there is still time to see how 2022 capital gains will play out, the tax hit for 2021 is a known quantity and the time to reinvest capital gains realized from the sale or exchange of capital assets—whether stocks, bonds, commodities, precious metals, businesses, real estate, patents, trademarks, collectibles, livestock, etc.—during the last four months in 2021 into a QOF is running out. Parking and investing those gains into a QOF can be a strategic solution for deferring capital gains taxes while affording time for the market to rebound, and also enjoying the possibility of tax-free appreciation on capital gains invested if held for 10 years.
Belpointe PREP (NYSE American: OZ) is investing into multi-family real estate properties with income producing potential in cities with vibrant job markets, which we believe is a viable asset class in the current inflationary environment. At Belpointe PREP (NYSE American: OZ) we build and acquire Class A, full-featured, apartment properties targeting Sarasota, FL, Tampa/St. Pete, FL, Austin, TX, the Research Triangle, NC and Nashville, TN and Boise, ID.
In our view, the Fed’s stated plan to raise their key rate over the course of 2022 can be looked at as a strong catalyst for property owners whose rents may be tied to cost-of-living indexes. A tight labor market for skilled workers appears to be pushing up wages in tandem with rents, keeping a strong set of fundamentals underpinning the Class-A rental property market.
In the world of tax planning, this can be an alternative proposition. Furthermore, Class A units of OZ can be bought and sold in the open market without penalty, allowing investors to add to or trim from the amount of capital gains sheltered at their discretion. Again, under the QOF structure, reinvested capital gains may grow tax-free if held for a period of ten years or more up to December 31, 2047.
We published a webinar in December 2021 conducted by Belpointe CEO Brandon Lacoff that might prove very informational for those not fully familiar with Opportunity Zones and specifically Belpointe PREP, its tax benefits, the future plans for the company and investment features and advantages over other QOFs. While this webinar was targeting December 31, 2021, it still spells out all the benefits for investing in OZ after January 1, 2022.
Take action and park your gains in Belpointe PREP (NYSE American: OZ) to insulate against paying capital gains taxes for this year, I suggest making it a priority to take the time to consult with your RIA, CPA, CFA and estate planners to gain full control of how to seize all the benefits of QOF investing and Belpointe PREP (NYSE American: OZ) in particular.
Have questions about how Belpointe PREP (NYSE American: OZ) can provide opportunities for investment appreciation income and help you or your clients to Defer or Eliminate Capital Gains Obligations?
Call or email us and we’ll take the time to answer all of your questions about Belpointe PREP (NYSE American: OZ) and how reinvesting capital gains in a QOF can be utilized to offset an investor’s tax obligation.
You can contact us at 203-883-1944 or IR@belpointeoz.com.
To your success,
Cody H. 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. 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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Belpointe PREP, LLC (“Belpointe PREP”) has filed a registration statement (including a prospectus) with the U.S. Securities and Exchange Commission (SEC) for the offer and sale of up to $750,000,000 of Class A units representing limited liability interests in Belpointe PREP. You should read Belpointe PREP’s most recent prospectus and the other documents that it has filed with the SEC for more complete information about Belpointe PREP and the offering
Investing in Belpointe PREP’s Class A units involves a high degree of risk, including a complete loss of investment. Prior to making an investment decision, you should carefully consider Belpointe PREP’s investment objectives and strategy, risk factors, fees and expenses and any tax consequences that may results from an investment in Belpointe PREP’s Class A units. To view Belpointe PREP’s most recent prospectus containing this and other important information visit sec.gov or belpointeoz.com. Alternatively, you may request Belpointe PREP send you the prospectus by calling (203) 883-1944 or emailing claidlaw@belpointe.com. Read the prospectus in its entirety before making an investment decision.
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