Don’t let the window to defer taxes close
I want to make known how informative I think the upcoming webinar—slated for March 15 at 1 pm ET—is going to be for current and new investors. Belpointe PREP, LLC’s (NYSE American: OZ) CEO Brandon Lacoff will speak on the state of affairs regarding Opportunity Zones, Qualified Opportunity Zone Funds (QOFs) and specifically Belpointe PREP. Belpointe PREP is investing in Class-A multi-family residential housing projects in vibrant job markets such as Nashville, TN, Tampa-St. Petersburg, FL, Austin, TX, Boise, ID and the Research Triangle, NC, and this webinar will go into detail about the investment proposition and the tax benefits that come with investing in OZ.
I believe that this webinar couldn’t be more-timely, given the backdrop of a stock market in turmoil. The war in Ukraine is revealing just how sensitive and fragile the global supply chain for vital products truly is. Take global semiconductor production, crucial to most every industry out there. According to the Wall Street Journal, Russia and Ukraine produce roughly 50% of the world’s semiconductor-grade neon, and Russia supplies approximately 37% of the world’s palladium, a metal used in certain senor and memory chips. Prior to the invasion, chip companies stocked up on both commodities, but those inventories will eventually run out.
A major short squeeze in Nickel pushed prices to their upper limit, and prices in other industrial metals and all forms of soft commodities are soaring as well. I believe crude prices are going to remain stubbornly high after the U.S. just sanctioned Russian oil and one can only wonder what the inflation data for February will be when reported later this week and early next week. The month of March has seen a further climb in all commodity prices and the Fed plans to fight that inflation with a paltry quarter-point rate hike off of a 0.0%-0.25% Fed Funds Rate.
It was only a week ago that Fed Chairman Jerome Powell said. “We have an expectation that inflation will peak and begin to come down this year.” This statement is endemic of a Fed policy that is in denial of what lies before them. The Fed will have to raise rates and sell Treasuries, reducing the balance sheet, at a more rapid pace to have any chance of cooling inflation against a backdrop of full employment, strong consumer demand, further supply chain constraints and the lifting of pandemic constraints.
Thankfully, job growth is strong, at least for now, and the U.S. remains a bastion of safe-haven investing in assets that are more domestic in nature and less vulnerable to geopolitical events outside its borders. I believe America is on a rapid learning curve that in order to protect its interests, it should stockpile heavily what it doesn’t produce and insource as much as possible of what it uses here at home. This lesson in Ukraine, Russia and China ought to be the greatest catalyst to shaping future domestic economic policy going forward.
But that’s long-range planning and not an investment strategy for how to take action to shelter 2021 taxes while there is still time. In my opinion, investors that are compelled to diversify away from stock market risk can do so quite easily by allocating capital into domestic rental properties of Class-A real estate, which is the business of Belpointe PREP (NYSE American: OZ). Inflation may be with us for all of 2022 and well beyond and I believe a discussion with your CPA, CFA, RIA or tax attorney, to consider investing in inflation-sensitive assets in essential sectors such as tax-advantaged multi-family residential property, might prove timely.
As for one’s personal tax situation, the first key tax deadline looms just five weeks away and I would venture to say that thousands of investors are set to pay taxes on their realized 2021 stock market capital gains, while round-tripping unrealized gains in 2022. If this is you, and you plan to file your 2021 income taxes by April 18, you might want to consider your immediate options for sheltering those 2021 capital gains, until December 31, 2026, in a QOF which brings with it the possibility of seeing appreciation and income on those reinvested gains going all the way out to 2047 when the Opportunity Zone program ends.
Let me spell it out in easy terms: A $500,000 capital gain reinvested in a QOF can provide you with the opportunity for growth and income while federal (and, in most cases, state) capital gain taxes on that original $500K are deferred as long as you hold the investment, and up until December 31, 2026. What’s more, potentially any and all of the capital gains and income derived on your original $500K may be tax-free if you hold your investment for a period of 10 years from the date of purchase, and may even keep earning tax-free returns until 2047.
Let me pose some serious 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 talked with your RIA, CPA, CFA or tax attorney about the extent of and strategy for your overall 2021 tax liability?
– Do you have to sell stocks or other assets between now and when you need to have funds ready to meet your tax obligation?
For wealthy investors the top federal tax rate 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 and the current slide in the market, I think it’s fair to assume an avalanche of extensions will be filed.
For RIAs with client assets where this is a 2021 tax scenario in the making, 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 may provide an opportunity to 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 QOF can be of real value. But timing is of the utmost importance as the clock for sheltering 2021 gains is ticking.
Because of the 180-day lookback period built into the regulations that govern QOF capital gains reinvestments, investors can shelter 2021 capital gains going back to a recognition date of September 12, 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 recognized on September 12, 2021 (or any time thereafter). Reinvest that same $500K capital gain into a QOF within 180 days of September 12, 2021 (or any recognition date occurring after September 12, 2021), and as long as you continue to hold the QOF investment there will be no federal—and, in most cases, state—taxes due on that $500K until you file your 2026 tax return in April of 2027 or you sell the position beforehand, whichever occurs earlier. In addition, there may not be a tax on any of the appreciation or depreciation you receive on your QOF 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 I 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 essentially the last three and a half 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 affording time for the market to run its course, and also enjoying the possibility of tax-free appreciation on capital gains invested if held for 10 years.
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 a compelling alternative proposition. Furthermore, Class A units of Belpointe PREP (NYSE American: 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 10 years or more up to December 31, 2047.
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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