December 31 Tax Shelter Deadline Looms
The week following Thanksgiving should have sounded the alarm bells in every stock investor’s mind about how precarious the future of investing is in a market where the Fed has turned from affectionately dovish to harshly hawkish. It’s as if Fed Chairman Jerome Powell got religion following the white-hot October reading on inflation at both the wholesale and consumer level that suddenly altered the discourse of the Fed’s narrative of inflation being “transitory”.
The ground seems to have shifted under the market soon thereafter amid widespread confusion after news of the omicron variant took hold of investor sentiment, sending the leading big-cap tech stocks lower in broad and heavy selling pressure. The notion of another pandemic wave heading into winter, further supply chain disruptions, elevated inflation and the Fed pulling the punch bowl resulted in a swift 5.2% correction for the S&P and a 6.9% pullback for the Nasdaq.
Equity markets stabilized Monday of this week, but for how long is the question. Aside from the stock market now having to fight the Fed and another Covid strain going forward, there are no less than four geopolitical risks facing equity markets to contend with. Russia is poised to invade Ukraine, the U.S. is issuing a diplomatic boycott of the Winter Olympics in China, both China and Russia are attacking U.S. satellites and Iran is ramping up weapons-grade uranium production in violation of the International Atomic Energy Agency agreement.
None of these geopolitical situations factor large in the bigger scheme of things for what has been a Teflon market – with the exception of inflation – which matters huge. Further constraints on supply chains and labor markets will, in my opinion, ultimately pressure profit margins within almost every industry. I believe what has already begun in the hyper-growth stocks by way of multiple contractions will invariably occur within every sector of the market to where the S&P reverts back to the mean of trading at its historical P/E depending on how high bond yields rise.
According to Fortune.com, the cyclically adjusted price/earnings ratio, or CAPE, Yale economist and Nobel Laureate Robert Shiller’s widely recognized valuation gauge, recently “hit a mark showing that the S&P 500 is now pricier than in 96% of all quarters over the past 141 years. Put differently, big-cap stocks have been this expensive only 4% of the time in the recorded history of equity markets.” The last time CAPE reached such heights was during the dot com bubble of 2000. Without question, low-interest rates and QE have justified the lofty market P/E – and it works as long as the Fed is priming the pump and holding rates at below 1.0%. That is now all changed and the path forward for equities just got rockier.
According to Yardeni Research, the forward P/E for the S&P stands at 20.5X and well above the 13-15 times the historical average when rates are more normalized. Again, this is largely resultant from the double-barreled stimulus of QE and financially engineered lower interest rates, both of which are now being removed from the macro picture. I have to believe that when Jerome Powell stated the Fed intends to end the taper a few months before plan, call it March or April, the market may not take kindly to the headlines of the Fed going from $105 billion per month of QE in December to zero, with the intent of raising Fed Funds soon thereafter.
On the other hand, tangible inflation-sensitive assets in the form of commercial real estate consisting of Class A multi-family residential real estate are, I believe, poised to produce both rising distributable income and steady capital appreciation. History is well on the side of this equation too. In my opinion, at no time in the past several years does this repositioning of assets look so timely given the writing on the wall regarding inflation, Fed fiscal policy and demand for high-quality rental units by a labor force that is enjoying strong wage gains in hot job markets.
And what about taxes? That is the third leg of the stool that has to be addressed. As a proponent of the Opportunity Zone investing, there are two pivotal tax benefits that investors should be aware of between now and December 31, 2021. We’re talking about three weeks left to move on this situation with most RIAs, CPAs, tax attorneys and estate planners checking out between Christmas and New Year’s. So, call it two weeks to safely do the math and take action.
The first is the five-year deferral of taxes on capital gains realized in 2021. When QOFs first went live in 2018, the set date to defer 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 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 saddled with 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, are a powerful investment proposition: reinvest capital gains into a Qualified Opportunity Zone Fund to shelter 100% of those gains for the next five years and establish a 10% step-up basis, with any and all future income and appreciation on invested capital gains being treated as tax-free (similar to a Roth IRA).
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.
To your success,
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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