Reinvesting Year-End Capital Gains Into Qualified Opportunity Zone Funds That Focus On Multifamily Residential Real Estate
The first tax deadline of the year is fast approaching and more investors and advisors are having to contend with how best to deal with year-end capital gains taxes on mutual fund and certain exchange-traded fund (ETF) earnings that can come as somewhat of a surprise—in some cases a big surprise. In years like 2021, where the stock market rallied to new all-time highs, mutual fund and ETF managers may have elected to liquidate a greater portion of their profitable holdings, thereby producing a big year-end tax bill for the funds’ shareholders.
Multiple tax grenades may well have gone off during October-November 2021, when year-end capital gains were declared, with corresponding dividends paid out in December 2021. As a consequence, investors will generally have to pay taxes on those mutual fund earnings that are classified as capital gains when the mutual fund shares are held in a taxable account. You see, when a mutual fund or ETF realizes net capital gains on the sale of its portfolio assets the fund itself generally does not pay taxes on those gains, but rather distributes them to its shareholders who must include the gains on their individual income tax returns as either long or short-term capital gains, depending on how long the fund held the asset giving rise to the gains.
This is a key point and means that at the federal level a tax rate of up to 23.8% for long-term capital gains and up to 40.8% for short-term capital gains could apply, 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. It’s important to consult with your own investment and tax advisers regarding the federal, state and local income tax consequences of long- and short-term capital gains in relation to your personal tax circumstances, which may vary in different tax situations.
I can’t stress enough the importance of holding tax-efficient mutual funds and ETFs. There’s always the inherent risk of a fund holding assets with extremely low-cost bases, assets that have been held by the fund for years, and that when sold generate capital gains that all fund shareholders are responsible for, even recent buyer of shares in said funds that did not participate in any asset value appreciation. But those shareholders will definitely participate in owing the long-term capital gains tax on that appreciation. This is tax grenade #1.
The next potentially unfortunate taxable event is called a “phantom tax” and is one that hits below the belt. In this scenario, the fund’s overall NAV may lose value for the year, and yet the fund may still generate a capital gains tax bill if long-term appreciated assets within its portfolio are sold without corresponding offsetting losses to alleviate that tax bill.
Take for instance this fictitious scenario: ABC Fund bought Alibaba Group Holding Ltd. – ADR (NYSE: BABA) in a promising large-cap China-only strategy in August 2015 at a price of around $60 per share. The stock is the top weighting in the fund’s portfolio and is sold out in mid-2021 at roughly $200 per share. Meanwhile, investor John Doe bought into ABC Fund in September 2021, and as a result now owes long-term capital gains tax on his portion of the fund’s $140 per share gain in the BABA stock. This is even the case where, for example, ABC Fund’s NAV may be down 20% since John Doe’s initial investment because the China market went through a steep correction. This is tax grenade #2.
For RIAs that have client assets where this is a 2021 event, the conversation about how this tax burden came about and what to do about it can be stressful. But it doesn’t have to be with a viable tax deferral strategy that can offset tax liabilities dollar-for-dollar. I believe the likelihood of those year-end unexpected capital gains being paid out and those accounts being taxed is relatively high. 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 mutual fund capital gains going back to late August as of this writing. This 2021 window closes with each day that April 18 approaches and will completely close by June 28, 2022. RIAs and investors that wait until April 1st to decide to shelter 2021 capital gains can only go back to October 4th as a date for assets sold thereafter that qualify. All assets sold prior to October 4th would be subject to capital gains tax and the clock keeps ticking forward.
Let’s assume you are faced with an unexpected year-end mutual fund related capital gain of $200K. If that $200K capital gain is reinvested into Belpointe PREP, LLC (NYSE American: OZ) within 180 days of the date you realize it, as long as you continue to hold OZ there will be no federal (and in many cases state) taxes due on that $200K until you file your 2026 tax return in April of 2027 or you sell the position. In addition, there generally may not be a tax on any of the appreciation or depreciation you receive on your OZ investment if you hold the investment for 10 years or more, up to December 31, 2047.
What’s more, we’re not just talking about go-forward capital gains realized in 2022, you can also include all capital gains realized going back 180 days from the date you invest. Using February 22, 2022, as the investment date, you can look back 180 days and protect any capital gains realized as far back as August 27, 2021, providing for an incredible tax planning tool and what we believe is a compelling incentive to build a 2021 tax buffer. Again, with each passing day, the window for sheltering 2021 capital gains from the IRS is reduced.
While there is 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 mutual funds but also from the sale or exchange of capital assets—whether stocks, bond, commodities, precious metals, businesses, real estate, patents, trademarks, collectibles, livestock, etc.—during the last four months in 2021 into a QOF is running out. Reinvesting those gains into a QOF can be a strategic solution for deferring capital gains taxes while 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 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.
Important Information and Qualifications
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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