Is it possible to invest in a way that provides a decent return and benefits the world? The two are not always mutually exclusive. Donor-advised funds provide a way to get the maximum tax benefits for your investment while opportunity zones deliver substantial tax deferment options. At CRE 2019, leading investors and advisors discussed the values of each.
Jacqueline Valouch, the Head of Philanthropy for Deutsche Bank Wealth Management works directly with families and individuals. Valouch says that donor-advised funds are the fastest growing charitable vehicle, outpacing private foundations by three to one. These funds allow people to make a charitable contribution and get the biggest tax deduction possible. The real benefit to the donor-advised fund is that you are able to decouple what is a tax-advantageous year from what you want to give, and how you want to give.” noted Valouch. “It allows people to be much more thoughtful and practice smart philanthropy.”
Donor-advised funds vs. private foundations
In the United States, the amount of tax deduction has a direct relationship with how much people give. This is particularly relevant within the real estate community which is often dealing with capital gains and other tax concerns. Privately held assets often fuel philanthropy, whether its properties held in LLCs or a C-corp and donor-advised funds offers a significant benefit. “When you give a donor-advised fund something that’s privately held you actually get the fair market value of the deduction as opposed to giving that same asset to a private foundation where you would only get a cost basis deduction,” added Valouch.
The promise of opportunity zones
As most investors know, the opportunity zones came out of the revisions to the 2017 tax codes. The zones were decided based on census tracts and input from individual governors to infuse development into low-income communities.There are 8,700 opportunity zones across all 50 states, in the District of Columbia, and in three United States territories.
Fred Hameetman, Chairman of The American Group, called opportunity zones “the best thing since sliced bread,” which got a laugh from the crowd at CRE2019. He went on to say that everyone who pays taxes should consider opportunity zones. His point was well-taken in the idea that opportunity zones allow investors to take capital gains from any sale and invest them within 180 days in an opportunity fund and defer taxes until 2026.
The goal of the tax benefit is to inspire people to invest in underserved or impoverished areas. As Ann Olson, CPA and Partner with LGSH pointed out, there are two ways of participating in opportunity zones. You can invest either in a fund or directly in a business or property by essentially forming your own fund. The business must have 70 percent of its assets within an opportunity zone. Olson also noted that depreciation recapture is not subject to deferment and would still be taxable. More regulations on opportunity zones were planned to be released in January but the government shutdown has slowed that plan down.
Once you invest in a property in an opportunity zone, you are responsible for substantially developing that property. The investor or developer must either develop the property within six months or present in writing a good faith plan of what will be done on the property. This could be a problem for an inexperienced investor who buys a property but may lack the expertise to develop it appropriately. An investor is required to spend a significant amount of money to upgrade the property.
“Chances are where you’re investing or near where you are investing, across the street, perhaps from where you are investing, you might find an opportunity fund,” said Teo Nicolais, Founder of Nicolais LLC. Nicolais said that for the first three quarters of 2018, transactions in opportunity zones went up by 80 percent. This indicates that a lot of savvy investors have already snapped up properties in these areas hoping to sell them at a premium which, as Nicolais pointed out, may mean that much of the profits have already been squeezed out of these deals. He also noted that not all opportunity zones are created equal and that maybe half were selected after intense research and consideration. Others were simply added in. The result is that as he put it, “some designated areas have no business being opportunity zones.”
Just because something has been designated as an opportunity zone it doesn’t mean there will be a lot of capital coming in. As always, do your due diligence on any investment. This is just one of many tax abatement methods to consider and act intelligently on. As Nicolais pointed out, no one should be investing in a property simply because it is in an opportunity zone, despite the temptation of it being the easiest tax deferral method that’s been seen in many years. All the other usual considerations must be factored into any investment.