The benefits of Qualified Opportunity Funds across portfolio types

 

The tax code has empowered a new investment vehicle

The recent introduction of opportunity zones (QOZs) and qualified opportunity funds (QOFs) offers an unprecedented chance to grow our portfolios while doing some good for the world all with a simple investment.

Thanks to one of the most significant tax code changes in recent history, investors can now defer, reduce, and eventually eliminate capital gains from any venture into a new kind of investment vehicle with a specified time period.

QOZs are special census tracts that state and federal governments have targeted for economic development. Census tracts are areas established by the U.S. Census Bureau about the size of a neighborhood with populations ranging from 2,500 to 8,000 people. Neighborhoods with a very special point of differentiation.

These neighborhoods, or QOZs, unlock a new kind of investment vehicle called Qualified Opportunity Zone Funds (QOFs). QOFs are the investment vehicles that allow people to invest in real estate located in QOZs, businesses, and stock. And these funds offer investors significant growth opportunities paired with never before offered capital gains tax advantages.


Investor types and why they’re investing in QOFs

Given their flexibility, versatility, and significant tax advantages, many different kinds of investors are already in on QOFs. Whether you’re selling digital assets, securities, or real property, there’s a variety of reasons to make the move.

Passive investors

QOFs are appealing to passive investors as an easy on-ramp to simple, tax-advantaged investments. Investors who are eyeing real estate as a passive income source especially like QOFs for being hands-off.

Purchasing real estate directly, such as in a 1031 exchange, requires direct property management. This is a significant time and money investment. In contrast, QOF investments are handled by the fund manager—but the investor still gets all the tax benefits. It’s especially suited for passive investors because there are zero taxes on fund profits when the QOF fund investment is held for ten years or more.

    • Easy on-ramp; just roll in other gains

    • No asset management required

    • Real estate investment without the hassle

    • Simplify tax time with deferrals and tax reductions

    • Sit back and watch fund earnings grow tax-free

Real estate investors

Real estate investment has a lot of moving parts. Even after dealing with agents, appraisals, inspections, and title transfer, there are always repairs, maintenance, and property management. QOFs are not only hands-off, but they’re more well-diversified than a 1031 exchange for a single real estate asset.

    • Real estate investment without the hassle

    • Built-in diversification

    • High growth potential

    • Defer and reduce on gains from other real estate investments

“Our primary target area for investment is the San Francisco Bay Area. We know this area and decided it made sense to invest where we have been investing for more than 20 years. We are primarily looking at the East Bay.”

- Taylor Lembi, Founder & CEO, M31 Capital

Stock market investors

Many stock market investors want to get into real estate for its excellent diversification and return potential, but they feel daunted by the steep learning curve and costs. For this reason, they may turn to real estate investment trusts (REITs) as a way to invest in real estate without the risks and obligations of direct property ownership.

But although REITs are bought and sold like stocks, taxation on REIT dividend payouts can be far more complicated than investors expect,1 and rolling brokerage fund capital gains into an REIT will still trigger short- or long-term capital gains tax.

So, although QOFs might superficially seem like REITs, they’re actually very different. Instead of further complicating your taxes, they simplify them by deferring, reducing, and eliminating capital gains altogether.

    • Real estate investment without the hassle

    • Simpler and more tax-advantaged than REITs

    • Built-in diversification

    • High growth potential

    • Defer, reduce, and eliminate capital gains taxes

Cryptocurrency investors

Cryptocurrency investors have faced an increasing amount of tax scrutiny in the last few years. While some were able to previously use like-kind exchanges for token-sales by claiming a like-for-like exchange of one token for another, that’s no longer possible with the IRS’s limitation of 1031 exchanges to real property. In light of this, crypto investors have limited options for protecting capital gains.

A QOF is a convenient, one-stop shop into which any and all gains can be rolled over to simplify tax time, deferring them until April 2027. Additionally, taxes are reduced by up to 15%—significant for any amount of crypto profits. For a portfolio that’s skewed too heavily toward risk in the crypto sector, a QOF also offers diversification for investors who are looking to move their assets from digital to tangible investments.

    • Deferrals to simplify tax time

    • Reduces taxes on crypto profits

    • Built-in diversification and risk-reduction

Socially conscious investors

Socially-conscious investors often struggle to find investments that match their ethics. QOFs finally provide an alternative.

Opportunity zones are selected by local governments, in collaboration with their communities, based on need and growth potential. Additionally, local growth is built into the U.S. codes establishing QOZs and QOFs.

Although the IRS and Congress are continuing to clarify this, opportunity funds must improve the QOZ properties and continue conducting most business within the opportunity zone.

And while some investors are concerned that QOZs may be a mechanism for gentrification, a recent Economic Innovation study reveals that most opportunity zones aren’t at risk for this. Opportunity funds finally let investors do good for their portfolios and the world.

    • Create real change

    • Support U.S.  communities

    • Transparency into investment recipients

    • Tax deferral, reduction, and elimination does good for your portfolio, too

“Our Morpheus 1 Fund will help address the severe residential housing shortage impacting the entire Bay Area by bringing more affordable living options for our city’s residents in underserved markets near job centers.”

- Taylor Lembi, Founder & CEO, M31 Capital


Three generations ahead of the competition

No matter what kind of investor you are or your specific portfolio needs, one thing is clear: opportunity funds have across-the-board advantages. So then the question becomes: which fund is right for you?

Founded in 2016, M31 Capital is an elite Bay Area real-estate investment firm that has consistently exceeded investor expectations. Our executives have acquired, managed, financed, and advised on more than $3 billion of real estate-related transactions.

As a result of our decades of Bay Area experience, we have a deep network of contacts, proprietary deal flow, and a supply line of resources to support our projects, frequently acquiring properties before they go on the public market.

We’re quick to hear when owners are selling, when a project is in financial distress, or if there is potential for a strategic partnership. Our contacts extend through the chain of resources required to develop a project — from banks and lenders to the building trades and rental/management companies.

In many cases we’ve known our partners for literally generations. And our portfolio of affiliated companies gives us significant competitive advantages in both the acquisition and development of real estate projects.

 

 

Footnotes
[1] https://www.simplysafedividends.com/intelligent-income/posts/18-a-short-lesson-on-reit-taxation