OZF's: The Devil is in the Detail
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Opportunity Zone Funds have gotten a lot of attention recently, and for good reason. These funds offer an enticing tax advantage for investing in underprivileged communities. However, like any investment, the devil is in the details.
Opportunity Zones and Qualified Opportunity Zone Funds
An Opportunity Zone is an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment. In December 2017, Congress passed the Investing In Opportunity Act. This law is designed to lure capital that faces heavy capital gains tax into funds which invest in the roughly 8,700 designated Opportunity Zones across the US. These zones are generally considered struggling cities or towns that are in need of redevelopment.
The vehicles that invest in Opportunity Zones are called Qualified Opportunity Funds. They are set up as either a partnership or corporation and they must invest at least 90% of their capital into eligible property located within an Opportunity Zone.
Tax Benefits
The program offers a tax incentive for investors to deploy their unrealized capital gains into these funds. Here's how:
- Deferral of capital gain. Investors enjoy a tax deferral for any capital gains rolled into a Qualified Opportunity Fund. The deferred gain would be recognized on the earlier of December 31, 2026 or the date on which the investment in the Fund is sold.
- A step-up in basis for capital gains rolled into an Opportunity Fund. The basis of the original investment is increased by 10% if the investment is held by the taxpayer for at least 5 years, and by an additional 5% if held for at least 7 years.
- No tax on any capital gains from an investment in a Qualified Opportunity Fund. After a 10-year holding period, there would be zero federal capital gains tax on profits from the sale of an investment in an Opportunity Fund.
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Not only can investors reduce or eliminate their capital gains tax burden, they can potentially make money in new investments, while helping underserved communities. What’s not to like?
Im
portant Considerations
Investors need to be aware that Opportunity Zone Funds frequently have the characteristics of a private equity or debt deal. They can tie assets up for the long term, charge significantly higher fees than the average mutual fund, and require an experienced manager who understands the nuances of the distressed real estate market. Some Opportunity Zones might face structural challenges that could outlast an investor's patience or the fund’s holding period, and, the government could always change the law and begin taxing capital gains again.
Yet, the most important consideration is that the underlying project still needs to make sense. And that part may not be so easy. Opportunity Zones were designated as such for a reason - they are the more impoverished areas in our country. Current government guidelines require funds to invest their capital in a timely manner or the entire fund could face penalties and potentially lose their tax incentives. There are more than 230 of these funds so far and as some big name managers race to enter this market, it may be hard to find investments that turn out to be successful.
The long-term objective of the program is to build wealth in communities that need it most and to save money for participating investors by reducing their federal capital gains taxes. A worthy goal, to be sure. But, like any investment, before jumping in, investors must do their homework to fully understand the potential upsides
and
the potential downsides.
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As mentioned above, the financial media has begun to shine a spotlight on Opportunity Zone funds. A journalist from Barron's recently reached out to our CEO, Daryl Deke, for his take on these investments. You can read about it
here
.
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Progress on the US China trade standoff drove market sentiment last week and equity performance was mixed. President Trump officially delayed the March 1 deadline for a trade deal and claimed “substantial progress” on a range of issues. Stocks rose on the news, but later fell back after chief trade negotiator, Robert Lighthizer, told a congressional committee that “much still needs to be done” before an agreement could be reached. However, reports late in the week claimed that the US and China could sign the draft of trade deal as early as mid-March. The tech-heavy Nasdaq performed best, while the smaller-cap benchmarks lagged. Volatility rose slightly from its multi-month lows the previous week.
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Bull Birthday
On March 9, 2009, the S&P 500 closed at 676.53, marking the low point for the worst bear market in stocks since the Great Depression. Few believed it possible at the time, but that was also the beginning of the longest bull market, at 120 months, since World War II.
While this might be the longest bull market ever, it isn’t the strongest (see chart above). Stock prices in the 1990s increased by 417% at the peak (the current market is up 314%). Another unique aspect: this bull market is the only one with two 20% or more declines based on intraday prices.
It’s worth noting that the S&P 500 hasn’t made a new high since September 20, 2018, so one could argue this bull market may have ended then. But if the S&P 500 climbs back above 2940, the bull run will officially mark 10 years and counting.
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Fourth Quarter GDP
The shutdown-delayed 4Q18 GDP was released last week and it showed the US economy grew 2.6%. That figure beat expectations, but signaled a slowdown from the previous quarter.
According the Bureau of Economic Activity, the economy grew at a solid 2.9% in 2018, up from 2017’s 2.2% pace. The chart above shows what contributed to this pickup in growth. Consumption and business fixed investment were the main contributors. Net exports detracted -0.2%, showing that trade tensions did not improve the trade deficit as desired.
GDP data represents a mixed bag. On the negative side, economic growth seems to be slowing. On the positive side, sluggish demand is holding both central banks and inflation in check and thus should ensure a generally low interest rate environment.
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Creative Writing
Sometimes kids don't know the real answer to their test questions and their creative answers are pretty entertaining.
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New Market Wealth Management offers the personalization of a boutique wealth manager coupled with the knowledge and resources of a large firm. Through our
strategic partnership
with Cliffwater LLC, a leading institutional research and advisory firm, and a minority partner, New Market Wealth Management specializes in an endowment style of alternative investment previously afforded to only large institutions.
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