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Opportunity Zones and Funds!!!!

So the TCJA has created a new monster called “Opportunity Zones”.  

The gist is this (as best I can understand it):  If you have $1m of stock and you sell it at a gain, you can reinvest the proceeds (within 180 days) in an “Opportunity Zone”.  Any gain on the sale of the stock is deferred.  

Once you invest in an OF (which, in turn, invests 90% of its capital in an OZ), if you hold the OF for five years, then you reduce your capital gain liability by 10%.  If you hold it for seven years, you reduce capital gain liability by 15%.  If you hold it for ten years, you recognize no capital gains upon disposition of the OF.  

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Here is a map of these so-called “Opportunity Zones”.

https://esrimedia.maps.arcgis.com/apps/View/index.html?appid=77f3cad12b6c4bffb816332544f04542

82 > 87
Simple math.

You guys help me understand this:

If I sell my Apple Stock and invest in a luxury condo at the corner of Martin Luther King Blvd. and Malcom X Blvd in Fair Park (south side of Dallas), I don’t have to pay tax on any capital gains at all?  What a deal!!!!

Here some other gems that are waiting to be uncovered:

  • North Oakland
  • Southeast Baltimore
  • Washington DC (the area around RFK Stadium)
  • East LA and San Bernadino
  • Basically all of Camden, NJ
  • Harlem

82 > 87
Simple math.

So is this just some loophole for Mnuchin’s friends to shield their gains from taxes? Those Oakland people are going to be pretty mad when property values go up and displace people renting there. 

“Visit the Water Cooler forum on Analyst Forum. It is the best forum.”
- Everyone

This was all the rage when the bill passed.  There are some funds specializing in this stuff.  The definition of assets is so broad, it makes it  appealing.

ohai gentrification is a great thing. it leads to better people in expensive areas. it reallocates the low ksilled workers out. bad neighborhoods are bad only because the people there are bad. if you pay them off to live in their proper place, the neighborhood becomes a better place.

anyways more info:

To provide some background, an Opportunity Zone is generally located in an economically distressed, or low-income, community. Each has been nominated by the state and that nomination has been certified by the Secretary of the U.S. Treasury. Their purpose is to spur economic development and job creation in distressed communities by making it more appealing to investors to invest in such places.

https://www.barrons.com/articles/opportunity-zone-funds-to-deliver-a-tax...

The potential investments that individuals, foundations, and corporations will be able to make are in “qualified opportunity zones”—8,700 economically distressed areas identified by each state and approved by the Treasury department. Generally, the designated communities have an average poverty rate of nearly 32% and an unemployment rate of 13%, according to the Urban Institute, a U.S. think tank.

In an interview with The Hill earlier this week, U.S. Treasury Secretary Steve Mnuchin predicted the new zones will attract $100 billion in capital.

But the Treasury has to publish regulatory guidelines before the dollars can begin flowing. Some investors are pushing for these guidelines to require investment funds in these zones to provide transparent data on how capital is being directed toward helping these communities, and what, specifically, have been the results in terms of jobs and poverty alleviation.

Here’s how it works: Some or all of a capital gain from an investment or property sale can be deferred for tax purposes within 180 days into an qualified opportunity zone fund. These gains won’t be taxed until Dec. 31, 2026, unless the interest in the fund is sold or exchanged, according to a guide by Abbot Downing.

If a taxpayer invests in the fund for five years, the capital gains tax will be cut by 10%; if the investment is retained for seven years, it’s cut by another 5%. If an investment is held in the fund for 10 years, there is no tax owed on new gains made from the initial investment.

I love my cheese. I got to have my cheddar.

You should visit the neighborhood you are interested in every day at 3AM and fire some gunshots in the air. Then, people will say there’s a lot of shootings and property values will drop. After you buy it, stop shooting and watch property value skyrocket because the neighborhood improved. You’re welcome.

“Visit the Water Cooler forum on Analyst Forum. It is the best forum.”
- Everyone

crassus, one of the richest people ever, did somethign similar. if you cant beat them burn them!

heres his fascinating story on how he made his money:

The first ever Roman fire brigade of which we have any substantial history was created by Marcus Licinius Crassus. Marcus Licinius Crassus was born into a wealthy Roman family around the year 115 BC, and acquired an enormous fortune through (in the words of Plutarch) “fire and rapine.” One of his most lucrative schemes took advantage of the fact that Rome had no fire department. Crassus filled this void by creating his own brigade—500 men strong—which rushed to burning buildings at the first cry of alarm. Upon arriving at the scene, however, the fire fighters did nothing while their employer bargained over the price of their services with the distressed property owner. If Crassus could not negotiate a satisfactory price, his men simply let the structure burn to the ground, after which he offered to purchase it for a fraction of its value. Emperor Nero took the basic idea from Crassus and then built on it to form the Vigiles in AD 60 to combat fires using bucket brigades and pumps, as well as poles, hooks and even ballistae to tear down buildings in advance of the flames. The Vigiles patrolled the streets of Rome to watch for fires and served as a police force. The later brigades consisted of hundreds of men, all ready for action. When there was a fire, the men would line up to the nearest water source and pass buckets hand in hand to the fire.

Rome suffered a number of serious fires, most notably the fire on 19 July AD 64 which eventually destroyed two thirds of Rome.

https://www.instash.com/top-10-richest-men-of-all-time/

1. Marcus Licinius Crassus (115 BC – 53 BC)

Net Worth: $2 Trillion

How He Made His Fortune: Proscriptions, slave trafficking, judicious purchases of land and houses, purchases of burning property.

About: Marcus Licinius Crassus was a Roman general and politician. Although he initially began with a rather large inheritance, he lost all of it during the Marian-Cinnan proscriptions, in which he was forced to flee to Hispania. However, Crassus would get his revenge while commanding the left wing of Sulla’s army, making a fortune from proscriptions himself.

Proscriptions were only part of his overall wealth. It is said that after receiving word of houses being on fire, Crassus would arrive with an army of 500 “firefighters” and attempt to offer a modest sum for the property. If the offer was refused, Crassus would let the property burn to the ground.

Crassus went on to seek political power and struggled throughout most of his career. His fortune, however, played a large part in gaining support from senators. He was eventually elected censor and helped finance Julius Caesar’s successful campaign to become Pontifex Maximus.

Known For: Suppressing the slave revolt led by Spartacus.

Fun Fact: After Crassus’ death, a story later surfaced that the Parthians poured molten gold into Crassus’ mouth as punishment for his greed.

I love my cheese. I got to have my cheddar.

^That was a good read.

We looked at OZ’s and came away feeling a bit cautious on them overall.  Many are racing to create deals in places they never would have looked.  As such, we prefer a deal that was palpable before tax reform with the OZ now just being icing on the cake.  You have to model at least a 10% base return for the OZ to start to make sense IMO (you get an extra ~5% return over 10 years upon not paying any taxes at exit).  Given you also have to wait a full 10 years, you might miss the opportune selling point or be forced to sell by other partners before the 10-year mark.  I’m sure there are gems to be had, but I wouldn’t take a big gain and reinvest all in OZs.