Sellers of Primary and Investment Properties Should Consider Pouncing on this 2022 Year-End Tax Window
The stock market topped out in early January 2022, when the S&P 500 traded at an all-time record high of 4,818. Those investors who sold into the massive March 2020 move lower should be congratulated. They likely saw the writing on the wall with the Fed exiting QE accompanied by the first hints of real inflation. Today, the S&P is trading roughly 19% lower with the Fed on the inflation warpath.
I think stocks were clearly inflated as an asset class, given the historically high P/E ratios, and now a reset seems to be underway. The market is in don’t-fight-the-Fed-mode and I think it will remain so at least until the rate of inflation is cut by half of where it stands today. The notion of the Fed targeting a 2% inflation rate—when the core rate is at 6.3% and the total rate is at 8.3%—is, in my opinion, a tall task and will very likely play out well into 2023 and maybe beyond. Nobody knows.
The other asset class that I think got way ahead of itself is housing, namely single-family home prices, which reached an all-time high of $420,900,000 in June of 2022, exactly six months after the stock market bubble was pricked. According to the National Association of Realtors, the median single-family home price in July 2022 was $410,600. Affordability for first-time and move-up buyers may be a major challenge and may about to get even more challenging.
Given the upward trajectory of mortgage rates, I think the race to capture profits in the single-family home market from owners of both primary and investment properties has been fierce. According to Zillow, the housing market has doubled in value in many of the nation’s hottest real estate markets over the past 10 years. For those with multiple properties, the thought of giving back 20%-30% in a cycle where 30-year fixed mortgage rates are about to top 7% might indicate that it’s time to sell—as the supply of homes for sale in July jumped to the highest level since 2009.
So, it is of no surprise to me that some of the air is coming out of the single-family home market. This week’s column is focused on sellers of properties from May 2022 forward, and especially those that are downsizing and those selling investment properties and looking for alternatives so as to not be rolling equity and capital gains into a downward trending market.
Take for example a couple of empty nesters that bought a home in Darien, Connecticut, for $1 million and sold that home for $2 million in June 2022 with the intention of moving to a warmer climate, say Miami, Florida, and into a $1 million condo. Our couple is opting to move down in price and invest the $500,000 (married couples can receive a $500,000 capital gains exemption on their primary residence) of capital gain into an investment property. The problem is that prime Miami condos and investment properties have also soared in value over the past five years, and our empty nesters may be leery of top ticking the Miami condo market.
Rather than risk a top dollar purchase now, they can rent a luxury apartment, or any other type of residence they desire, and reinvest their $500,000 of capital gain into Belpointe PREP, LLC (NYSE American: “OZ”), the only publicly traded Qualified Opportunity Zone Fund (“QOF”) on the market. As a result of investing in Belpointe PREP our empty nesters can then defer the federal (and in many cases state) capital gains tax on their $500,000 profit out to December 31, 2026.
Belpointe PREP is striving to build out a diversified fund with a high-level focus on multi-family housing projects in those markets where the migration of young workers and families are in a secular uptrend.
In the instance of owners of investment properties that took full advantage of the bull market in single-family homes to lighten up their holdings into this summer’s peak conditions, they may also be planning to wait out the current market consolidation, which could take years if mortgage rates stay elevated. Here too, reinvesting realized capital gains on the sale of investment properties into Belpointe PREP, LLC (NYSE American: “OZ”) and deferring taxes out four plus years makes, I think, for a compelling alternative investment opportunity.
Further, what is a headwind for the single-family home market, can be a tailwind for the Class A multi-family residential market. Take for instance Sarasota, Florida, where Belpointe PREP, LLC (NYSE American: “OZ”) is actively breaking ground on a project within an opportunity zone area. Once considered a playground for retirees, according to U.S. News & World Report’s list for 2022-2023, Sarasota holds the #9 ranking as the best place to live and #1 ranking as best place to retire in the U.S., as droves of young professionals and new businesses are moving there.
Consider the rapid 20% rate of population growth in Nashville, Tennessee, over the past seven years. According to a February 2022 Wall Street Journal article, next to Austin, Texas, Nashville is the second hottest job market in the U.S. Here, too, Belpointe PREP (NYSE American: “OZ”) has acquired several properties, one for just under $20 million, to redevelop and build out an approximately 266-apartment home community consisting of two 7-story buildings. Belpointe PREP anticipates that the buildings will have a fitness center, courtyard with a swimming pool and rooftop terraces, among other amenities.
Rent growth also remains hot in the markets that Belpointe PREP is currently targeting for stabilized acquisitions with a focus on generating free cash flow: Raleigh, Durham, and Charlotte, North Carolina, Nashville, Tennessee, and St. Petersburg, Florida. Many of these area are seeing employment levels top pre-pandemic levels, which in turn is driving demand for full-featured Class-A apartments resulting in a steady rise in rental rates.
Qualified Opportunity Zones have been designated in all 50 states, the District of Columbia, and 5 U.S. territories. While many Qualified Opportunity Zone Funds (“QOFs”) are invested in a single property. Belpointe PREP (NYSE American: “OZ”) is striving to build out a diversified QOF, but with a high-level focus on multi-family housing projects in those markets where the migration of young workers and families are in a secular uptrend.
With literally hundreds of QOFs to choose from, Belpointe PREP, LLC (NYSE American: “OZ”), is the only publicly traded QOF where, if you purchase units in the market, there is no minimum investment. Because “OZ” is a listed company, transparency is considerably higher than that of many privately managed QOFs. In addition, while most other QOFs have limited or restrictive redemption features, OZ unitholders can buy and sell Class A units in the open market.
One more key item, which I think is of huge importance, is that unitholders of OZ are not at risk of receiving and being liable for any future capital calls. Capital calls are an unfortunate feature many investors may regularly face in acquiring, developing and renovating private opportunity zone properties.
Investing into a QOF, like Belpointe PREP (NYSE American: “OZ”), allows an investor to defer the tax payment on invested capital gains through the earlier of tax year-end December 31, 2026 or the date on which they sell their investment. Plus, all income and appreciation from the time one invests into a QOF through December 31, 2047, is potentially tax-free. We spell out how this alternative can work for you in our updated white paper. Follow this link here to request the White Paper.
Have questions about how Belpointe PREP (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 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 into a QOF can be utilized to offset an investor’s tax obligation.
You can contact us at 203-883-1944 or IR@belpointeoz.com.
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.
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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
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