The Clock Is Ticking to Benefit From CrowdStreet's QOZs
One of the most substantive innovations of the 2017 Tax Cuts and Jobs Act was the creation of "qualified opportunity zones," or QOZs, which have the aim of stimulating long-term investment in economically distressed communities. In order to increase capital flows into dedicated QOZ funds, the legislation provided a number of major incentives for investors.
QOZ funds provide significant long-term benefits for investors. However, to reap the full rewards of QOZ exposure, investors will have to move fast. Thankfully, there are still ways investors can do so, including a newly minted QOZ fund from CrowdStreet, the nations premier real estate crowdfunding platform.
The sweetest deal in real estate
The headline benefits of QOZ investments include temporary deferral of taxes from capital gains reinvested in a QOZ fund and permanent exclusion of capital gains from taxable income from QOZ funds after 10 years. These major boons of QOZ fund investments will still be available to investors next year, but one will not: a 10% step-up in basis prior to paying deferred taxes. To gain this benefit, investors must have been invested in a QOZ fund for at least five years as of Dec. 31, 2026. Dec. 31, 2021 is exactly five years before the 2026 cutoff. In other words, investors must make their QOZ fund investments before the end of this year in order to gain the full benefits of exposure to an opportunity zone.
Paying capital gains tax on only 90% of deferred capital gains is a sweet deal by any measure, but especially so given the long-term tie-up of capital required to gain the full benefits of a QOZ fund investment. It is an unambiguous opportunity to lock in excess returns in a real estate investment that has already been sweetened by favorable tax incentives.
The clock is ticking
While many QOZ investments will still offer attractive returns after the new year, leaving the 10% step-up in basis on the table is less than ideal. For many investors attracted by the allure of QOZs, the challenge is to find a QOZ fund that will work for them. With only a few days left in the year, some investors may struggle to find a QOZ fund that fits their needs.
In my ongoing search for enticing QOZ opportunities to close out the year, I recently lighted upon CrowdStreets QOZ Fund III. CrowdStreet is aiming for a healthy internal rate of return of 11.5%, which might be enough to entice some investors on its own. However, what really piqued my interest is the funds diversification benefits. Instead of being a single-sponsor fund with a specific geographic exposure, CrowdStreets latest QOZ fund offers exposure to multiple sponsors in a range of opportunity zones spread across high-growth geographies. That reduces potential idiosyncratic risks associated with a particular sponsor or developer, as well as those that attend a specific city or region.
The new year beckons
There will undoubtedly be plenty of opportunities for savvy real estate investors in 2022 across a range of asset types, from REITs to private funds. However, I fear that opportunities may prove harder to find than they have been in recent years. The imminent return of rising interest rates, which I discussed recently, could dent some real estate investments over the near term. That could make the market somewhat less forgiving than it has been in recent years. Hence, I see greater potential for market-beating returns in tax-incentivized QOZ funds than in the more conventional publicly traded diversified REITs offered by the likes of BlackRock Inc (NYSE:BLK) and its well known iShares Global REIT ETF (REET).
In my view, investors seeking long-term real estate investment opportunities need look no further than QOZ funds. But the clock is ticking, with many QOZ funds determined to close before the end of the year. CrowdStreets third QOZ fund, for example, is set to close on Dec. 28 in order to get capital invested before the end-of-year deadline. Clearly, investors eager to reap the full benefits of QOZ exposure have little time to waste. Unfortunately, investing in these funds is not as straightforward as investing in stocks. Trade carefully!
Disclosure: No positions.
This article first appeared on GuruFocus.
