Defer 2021 Mutual Fund and Exchange-Traded Fund Capital Gain Distributions By Reinvesting In A Qualified Opportunity Zone Fund
Of the many questions I receive every week, the newest and more frequent ones are from investors and advisors asking about taxes on mutual fund and certain exchange-traded fund (ETF) earnings. In good years for funds, such as 2021, investors may have received notices of large capital gains generated that are declared during October-November and typically paid out in December. For many, this comes as a surprise, and it can be a big surprise. Capital gains are a good thing, but unexpected tax bills are not.
Investors generally have to pay taxes on mutual fund earnings that are classified as capital gains when they occur in a taxable account. When a mutual fund or ETF realizes net capital gains on the sale of its portfolio assets the fund 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.
Many mutual funds estimate their year-end distributions between September and October, and pay out dividends and capital gains in December. This is where the old adage about never buying into a mutual fund in December comes from. Investors who purchase mutual fund shares prior to the ex-dividend date will receive dividends and capital gains that have accumulated during the prior year. This may seem like windfall, but it’s not. Typically the mutual fund’s share price will fall by the same amount as the payout—for example, you receive $3 per share in dividends and the share price drops by $3 per share—effectively refunding you a portion of your original purchase price. However, as far as the IRS is concerned, that $3 per share is taxable income. So if you buy after the ex-dividend date, you not only get a $3 per share discount but you also avoid getting hit with a big tax bill on phantom profits.
In addition, depending on the embedded capital gains in a fund’s portfolio assets, the sale of certain holdings may generate significant net capital gains for shareholders who did not otherwise participate in the appreciation of those portfolio assets. Take for instance XYZ Mutual Fund that bought Amazon.com Inc. (NASDAQ: AMZN) at $750 per share back in early 2017. The fund manager decides to sell the AMZN stock on August 15, 2021 at $3,600 per share, generating a long-term capital gain of $2,850 per share.
Now suppose investor John Doe had bought shares of XYZ Mutual Fund on August 14, 2021. He will now owe up to 23.8% in long-term capital gains tax on the AMZN sale, even though he wasn’t along for the ride. Funds can also lose value for the year in a down market and still generate a capital gains tax bill if long-term holdings are sold within the fund and not offset with losses.
For RIAs that have client assets where this is a 2021 event, I believe the likelihood of those year-end unexpected capital gains being paid out and those accounts being taxed is relatively high. As such, I also believe that finding an avenue for possibly offsetting those taxes would be wise path to take; offering a possible solution to the tax burden and preserving AUM. This is where the 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, investors can shelter 2021 mutual fund capital gains going back to mid-August as of this writing. This 2021 window closes with each day that April 15 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 will generally be no 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. While arguably similar to a Roth IRA, there is no other retirement plan in the world that allows for this kind of tax-free compounding with no cap on initial capital invested.
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 15, 2022 as the investment date, you can look back 180 days and protect any capital gains realized as far back as August 20, 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 tax man 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 the sale or exchange of capital assets—whether stocks, bond, commodities, precious metals, businesses, real estate, patents, trademarks, collectibles, livestock, etc.—during the last five 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 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, rising interest rates on the short end of the yield curve can be looked at as a strong catalyst for property owners whose rents may be tied to cost-of-living indexes. Tight labor conditions for skilled workers appear 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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Neither Belpointe PREP nor any of its affiliates provide investment or tax advice and do not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should consult their own investment and tax advisers concerning the U.S. federal, state and local income tax consequences, as well as any tax consequences under the laws of any other taxing jurisdiction, in relation to their personal tax circumstances, which may vary for prospective investors in different tax situations.
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