Taking advantage of opportunity zone investments for tax breaks requires high risk tolerance

Advisers say people most likely to participate also meet the income and net-worth thresholds to qualify as accredited investors

Oct 22, 2018 @ 4:43 pm

By Mark Schoeff Jr.

A federal program designed to encourage capital injections into economically distressed areas could be a good option for investors sitting on a lot of capital gains and possessing high risk tolerance, according to advisers and other experts.

Last Friday, the IRS released proposed regulations for a so-called opportunity zone tax incentive. Under the measure, investors can defer almost any capital gain until the end of 2026 if they invest it in a fund that targets a project in one of 8,761 communities designated in all 50 states, the District of Columbia and five territories.

Investors who maintain an opportunity zone investment for five years would get a 10% reduction in the deferred capital gains; they would get a 15% reduction if they hold the investment for seven years. If they stick with the investment for 10 years, they do not have to pay capital gains taxes on any returns they receive from the opportunity zone.

Matt Chancey, investment adviser at ClaraPhi Advisory Network, is enthusiastic about the possibilities of what he terms "defer, reduce and eliminate."

"I would argue that it's a great idea — maybe the best tax-based legislation that has passed in a lifetime," said Mr. Chancey, who does due diligence on alternative investments for his firm. "There are estimates that over $6 trillion of assets will flow into qualified opportunity zones. The key will be finding the right investment."

Marc Schultz, partner at law firm Snell & Wilmer, said opportunity zone incentives are something financial advisers should evaluate to see if they're a good fit for their clients.

"The regulations are very taxpayer friendly and provide a lot of flexibility for the industry," Mr. Schultz said.

The opportunity zone tax breaks were included in the tax reform law Congress approved in late 2017. The proposed regulations will be open for public comment for 60 days after they're published in the Federal Register.

The government likely will generate interest in investment in the zones with the incentives, said Cynthia Krus, partner at Eversheds Sutherland.

"The possibility of not having any taxes on your investment I would think would be popular," she said. "It could be a boon for these districts."

But real estate and business projects in distressed areas could be among the riskiest investments in a client's portfolio. Advisers should proceed with caution, said David Mendels, director of planning at Creative Financial Concepts.

"A real estate investor who really knows the area well and knows what they are doing might be a candidate" for an opportunity zone fund, Mr. Mendels said. "You're not betting on successes; you're betting on things that might be a success. If you don't know what you're doing, you're going to get yourself in trouble quickly."

Although there could be avenues for ordinary investors, those who are likely to participate in opportunity zones also meet the income and net-worth thresholds to qualify as accredited investors.

"These are very complex and can be very risky investment strategies, which is not to say they're bad investments," said Anthony Chereso, president of the Institute for Portfolio Alternatives. "For the right individual, there's potentially a lot of good tax benefits."

If capital does flow into low-income neighborhoods, it will boost the overall economy, he said.

"Creating incentives for capital to invest in these areas, creating jobs, creating sources of income and stability is a major plus," Mr. Chereso said.

0
Comments

What do you think?

View comments

Most watched

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print