Rising inflation and interest rates have increased the cost of doing business in the real estate market, but QOZ’s best days are still to come. So what is the relationship between opportunity zones and inflation? What if it is positive?
In June 2022, inflation will reach 9.1%, the highest in 40 years. Although slightly lower (‘only’ 7.1% in November), there are no signs that inflationary pressures, a key concern for most investors, will end anytime soon.
Of course, rising prices are not the only concern we face today. The 2022 inflation spiral led directly to a series of interest rate hikes, which in part directly resulted in him double-digit losses in the stock market.
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Is support for the U.S. economy progressing? Don’t hear most of the economists talking about it. Those who don’t think we’re in a recession right now think we’ll have one in the next 6 to 12 months.
Is there a positive relationship between opportunity zones and inflation?
Given this background, what do investors need to know about Opportunity Zones now? (opens in new tab) and macroeconomic turmoil? Could there even be a positive relationship between inflation and opportunity zones?The answer is yes, as long as he admits that real estate investing is one of the best ever hedges against inflation.
Opportunity Zones Created by the Tax Cuts and Jobs Act of 2017 (opens in new tab)Also known as Qualified Opportunity Zones or QOZs, these areas range from rural areas with little economic development and few services to their inhabitants, to densely populated cities with neighborhoods and industrial areas in transition. It covers the range.
Opportunity Zones Have Multiple Tax Benefits
Of course, many investors are at least partially motivated by the possibility that their investment capital will work in the form of community development, but the positive returns from such investments that come with multiple tax benefits. is still the main motivation. , held to maturity and 100% tax-free if all IRS regulations apply. continued.
For more clarity…
Companies or individuals with unrealized capital gains are eligible to create Opportunity Zone Funds (opens in new tab) Invest and enjoy at least one of two major tax benefits, as well as the potential return on your investment.
- Temporary deferral of capital gains tax. Investing realized gains in a Qualified Opportunity Fund means that those capital gains will not be taxed until the end of 2026 or until the assets are sold, whichever comes first.
- Permanent exclusion of taxable income for new capital gains. Finally, capital gains tax on Opportunity Zone investments is completely eliminated if the investment is held for at least 10 years.
Real estate-minded investors often find additional appeal if their dollars are invested locally.This is where OZ funds can really shine.Designated in the Opportunity Zone 8,762 census tracts (opens in new tab) Representing 50 states, 4 US territories, and the District of Columbia, it’s relatively easy to find an OZ fund with local benefits and great investment potential wherever you are.
How will inflation and general macroeconomic turmoil affect the viability of QOZ investments?
While real estate is generally valued as a hedge against inflation, it’s important to remember that the idea of investing in development stage properties is a little more nuanced. As with any investment, risk and reward are intertwined and should be considered accordingly.
The QOZ fund has found itself facing headwinds as both inflation and interest rates continue to rise. There seems to be no end in sight to rising costs as the Fed promises to raise interest rates just enough to beat rising inflation. We operate in the real estate market.
Are the best days of Opportunity Zone funds over? In a nutshell: No
In fact, Congress is currently considering extending OZ benefits for at least two more years. While QOZ’s investment returns may be difficult to predict in the short term, it is not intended to be a short-term investment and should not be viewed as such. For investors with large capital gains, the OZ program must be viewed as intended. From an investment that has greatly increased in value.
It doesn’t matter if your profits came from a bubbled stock market, the sale of a private business, or a real estate deal that benefited from years of historically low interest rates. Related tax incentives provide an umbrella against a potentially staggering tax burden.
It is not difficult to visualize higher interest rates in the foreseeable future. This increases the dollar value of capital gains. Coupled with potentially higher federal and state tax rates, the value of investing in the OZ Fund cannot be underestimated as a means of reducing the current tax burden, and in the long term it could be fully realized. may be eliminated.
As always, it is wise to consult with your tax advisor and financial planning team before making any investment.
Daniel C. Goodwin Provident Wealth Advisor (opens in new tab) When AAG Capital Co., Ltd. (opens in new tab) We are not attorneys and do not provide legal advice. The content of this infographic should not be construed as legal or tax advice. Investors are always advised to seek competent legal and tax advisors for their own unique circumstances and state-specific laws.visit our website provident1031.com (opens in new tab).
This article was written by and represents the views of a contributing advisor, not Kiplinger’s editorial staff.Advisor records can be viewed with the SEC (opens in new tab) or at FINRA (opens in new tab).