What could a long term Opportunity Zone investment do to your bottom line? Many potential OZ investors are curious of what the returns could look like for them. In this simplified model, we make the following assumptions:
Craig and Claire own a popular ice cream shop in a stand-alone building near the beach in Santa Cruz, CA. 30 years ago, they purchased the shop along with the building for $200,000. Since then, Santa Cruz has grown in popularity with tourists and the building and business have appreciated considerably. Now that they are in their late 60s, they would like to sell the business and spend their retirement traveling abroad. They get an offer for $2.5M for the business, and they are elated. However, they want to be sure they are maximizing proceeds from the sale of their business to bolster their retirement income. They anticipate a significant capital gain tax bill, so they reach out to a financial advisor to learn more about their options.
Craig and Claire’s financial advisor, Julia, tells them that their timing is perfect, because the 2017 Tax Cut & Jobs Act created a program that would allow them to invest their impending capital gain tax-free until the end of 2026, making even more money for them over the years if invested well. She explained that by investing in a census tract designated as an Opportunity Zone –an area noted to be in need of economic development– their capital gain could continue to earn tax-free through 2026, and the gains made on their investment would be tax-free if the investment is held for 10 years or more. This was music to their ears, and they immediately asked how they could get started.
Julia explained that step 1 is to find and vet Qualified Opportunity Zone Funds. She recommended that they check out OZ FundHub (OZFH), as it is the premier platform to connect OZ investors with experienced fund managers. Using the tools on OZFH, Craig and Claire are able to attend OZ FundHub Connect events where they can listen to funds pitch themselves live and ask questions. They can also find information about hundreds of funds on the website, as well as learning the basics and logistics of OZ investing.
After doing their homework on Opportunity Zone Fund options, Craig and Claire selected a single-asset fund planning affordable housing in their home state of California. They made sure to invest their capital gain within 180 days of realization to meet the program requirements. The fund they selected plans to refinance at the end of 2026, an attractive option to investors as it plans to pay out enough cash to pay the tax on the original capital gain but continue the investment for at least another 5+ years to realize the additional tax benefits.
Here is a simplified breakdown of Craig and Claire’s OZ investment, with a side-by-side comparison to what it would look like without the Opportunity Zone designation:
If all goes well, Craig and Claire can expect to add over $1M more toward their retirement income due to their tax savings than if they invested in a similarly structured non-OZ fund. This is a 31% gain.
Interested in seeing how Opportunity Zone investing can work for your needs? Check out our Learning Center and our blog to find out more about why OZ investing may be perfect for you.
*Important Notice: OZ FundHub is not a licensed tax, accounting, or financial firm. All Information contained is for educational purposes only.*