Putting In Place A Long-Term Tax-Favored Inflation Hedge
The investing landscape is taking on a whole new narrative. Soft landing, hard landing … how about no landing? Such is the talk of market participants and a growing number of economists. Suggesting that perhaps inflation will persist in the 3%-4% level, at best, despite the Fed’s latest efforts to fashion a 2% rate, which now seems elusive given the recent robust jobs and retail sales data. Toss in last week’s CPI data for January and I think it is pretty clear that the Fed has more wood to chop.
Let’s take a moment to unpack the latest CPI figures. For the uninitiated, the CPI index is made up of a basket of goods and services that American households consume, and the shelter index—made up of the service that a housing unit provides to its occupants—is one of the largest components of the CPI index. The two largest components of the shelter index are owners’ equivalent rent of residences and rent of primary residence, and together they measure a majority of the changes in shelter costs experienced by consumers. All three of these items—the overall shelter index, and the owners’ equivalent rent of residences and rent of primary residence components—are published monthly in each geographic area for which CPI data is published.
Per the most recent CPI report: the shelter index continues to rise, increasing 0.7% over the month of January; the rent index and the owners’ equivalent rent index each also increased by 0.7% in January; and the lodging away from home index increased by 1.2% in January.
Overall, the shelter index was the leading factor in the monthly increase in the CPI index for all items less food and energy, with other components registering a mix of increases and declines.
Simply stated, there appears to be an ongoing demand for good housing in good locations where jobs are aplenty and migration trends are strong. One would think that with 30-year fix mortgage rates now quoted at around 6.77% on a national basis, there would be a crack in the armor of the rental market. The evidence is not yet there.
United States – Consumer Price Index for All Urban Consumers: Owner’s Equivalent Rent Of Residences in U.S. City Average
Source: Trading Economics (Accessed February 21, 2023)
The chart above, in my opinion, is about as bullish as any I’ve seen of late and should relieve those investors that the rental market is somehow going to soften up soon. The job market is lacking sufficient numbers of available workers to fill the roughly 11 million job openings, which, I think, is keeping just enough upward pressure on wages to deter folks that want to maintain optionality from buying a primary residence rather than seeking shelter in Class A apartments in full-featured communities.
There is, in my view, a heightened sense of uncertainty about economic and market conditions, other than perhaps the fact that it is currently tax season and most investors are certain about whether or how much they will have to pay to the IRS. Enter Belpointe PREP, LLC, (NYSE American: “OZ”), the only publicly traded Qualified Opportunity Fund (“QOF”). Belpointe PREP’s (“Belpointe OZ’s”) strategy is simple: continue to build out full-featured Class-A apartment projects while also looking to acquire seasoned and stabilized assets that can generate income and long-term appreciation on underlying properties.
For scores of sellers of real estate having a publicly traded entity with Opportunity Zone tax benefits (as outlined in greater detail below) can offer an alternative hypothesis for how to approach the next phase of the real estate market.
If there is more air to come out of the housing market, then those seeking a different path after selling a primary residence or investment property—and even those who have sold a business, or any other type of capital asset—should consider reinvesting the sale proceeds into Class-A multifamily real estate in markets exhibiting population growth, employment growth rates, and rental growth rates.
Whatever the case may be—downsizing, fear of price declines, changing life priorities—there are a number of reasons why investors might seek exit opportunities, but I think the most compelling strategy is the one that allows both the optionality to take a hand off the wheel, while at the same time maintaining a hand in income-producing real estate through an ownership interest in fully-managed commercial Class-A multifamily apartments complexes that are situated in desirable Opportunity Zones, loaded with tax benefit options and growth prospects.
Being a conduit to the outside world of investors, I run into all manner of reasons why people are looking for real estate optionality. They love the market, but things may have changed in their lives and they need a fresh idea or avenue to approach it. QOFs may fit that profile to a tee, and I invite all readers of this column to reach out to me to get the most updated status on Belpointe OZ and its assets.
Many of the investors that I come into contact with are already trying to get a leg up on tax season, and if you are too, I think it’s important to bear in mind that the 180-day lookback period to defer short and long-term capital gains realized in 2022 continues to tick away. Meaning that under the Opportunity Zone regulations, profits have to have been booked sometime after August 25 2022, in order for you to still be eligible to reinvest your realized capital gains into a QOF, such as Belpointe OZ (NYSE American: “OZ”), and defer or even eliminate your capital gains tax obligations.
The Opportunity Zone regulations don’t just cover those that are looking for ways to shelter 2022 sales of all classes of tangible and intangible assets from taxes; there’s also 2023 to think about. Take the example of those investors that I speak with that are in the throes of a 1031 exchange and have sold residential properties without having identified a replacement property that qualifies as “like kind” within the 45-day deadline required by the 1031 rules, or that are struggling to arrange for attractive financing, or that have had a transaction fall apart, or that have even mistakenly bypassed using a qualified intermediary and taken possession of the sale proceeds themselves. This may be your situation as well. In many cases, such investors are still eligible to reinvest their realized capital gains into a QOF, such as Belpointe OZ, and you may be too.
As I noted earlier, some sellers of real estate may simply be forgoing the 1031 exchange route altogether for a variety of reasons, and here, too, it may make sense to shelter capital gains from taxes by reinvesting them into a QOF structure—like Belpointe OZ.
We also spell out how investing in a QOF like Belpointe OZ can work for you in our white paper. Follow this link to request the Publicly Traded Opportunity Zone Investing White Paper.
Investing in Belpointe OZ (NYSE American: “OZ”) is as simple as buying any other publicly traded equity. If you purchase Belpointe OZ’s Class A units in the open market, there is no subscription agreement or investor certification required; you can simply purchase Class A units through any brokerage account. Belpointe OZ offers the same Opportunity Zone benefits as any private structure. To properly defer your reinvested capital gains, your accountant will need to file IRS Forms 8949 and 8997 with your tax returns. You will need Belpointe OZ’s EIN, which can be found here: Belpointe OZ EIN
To perhaps help facilitate the decision-making process, I want to note some features that are common to all QOFs, and some that are specific to Belpointe OZ, which I have included in bold type:
- QOFs provide for pass-through income, thereby avoiding double taxation for investors;
- QOFs provide for pass-through depreciation, with no depreciation recapture if an investment is held for 10 years, up to December 31, 2047;
- QOFs require annual distributions of at least 90% of taxable income;
- QOFs provide for up to a 20% reduction on taxable distributions via Internal Revenue Code Section 199A;
- Belpointe OZ provides for asset diversification;
- Belpointe OZ provides investors with greater control over their exit timing and amount;
- Belpointe OZ offers low minimums for investor access;
- Belpointe OZ unitholders will not be asked to add additional capital for any type of improvements or problems with investment properties;
- Belpointe OZ provides investors with better reporting, transparency, and oversight;
- Belpointe OZ provides investors with the opportunity for daily liquidity;
- Belpointe OZ allows both accredited and non-accredited investors to access the investment class; and
- Belpointe OZ simplifies the investment purchase process.
Further, in its effort to disrupt the U.S. real estate industry, Belpointe OZ is charging among the lowest fees in the market:
- No investors servicing fees;
- No disposition fees;
- 0.75% annual management fee; and
- 5% carried interest.
Have questions about how Belpointe OZ (NYSE American: “OZ”) can provide opportunities for investment appreciation and income and help you or your clients to defer or eliminate capital gains tax obligations?
Call me, Cody Laidlaw, at (203) 883-1944. I can answer your questions and direct you to resources that will provide you with information about the nuts and bolts of QOFs and opportunity zone investing, so you can start planning today.
Cody H. Laidlaw
255 Glenville Road
Greenwich, CT 06831
T: (203) 883-1944
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.
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 email@example.com. Read the prospectus in its entirety before making an investment decision.
This communication, including any links embedded herein, may not be distributed in any jurisdiction where it is unlawful to do so. Nothing in this communication is or should be construed as an offer to sell or solicitation of an offer to buy Belpointe PREP’s Class A units in any jurisdiction where it is unlawful to do so.
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.
This communication may contain estimates, projections and other forward-looking statements, typically identified by words and phrases such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” or the negative of such words and other comparable terminology. However, the absence of these words does not mean that a statement is not forward-looking. Any forward-looking statements expressing an expectation or belief as to future events is expressed in good faith and believed to be reasonable at the time such forward-looking statement is made. However, these statements are not guarantees of future events and involve risks, uncertainties and other factors beyond Belpointe PREP’s control. Therefore, we caution you against relying on any of these forward-looking statements. Actual outcomes and results may differ materially from what is expressed in any forward-looking statement. Except as required by applicable law, including federal securities laws, Belpointe PREP does not intend to update any of the forward-looking statements to conform them to actual results or revised expectations.
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