TAX BENEFIT & GAIN DEFERRAL INVESTMENTS
POTENTIAL CURRENT YEAR TAX DEDUCTION AND CAPITAL GAIN DEFERRAL THROUGH
Through Exclusive Advisors, we have access to a number of private investment programs that offer potential tax benefits. These types of investments are typically Regulation D Private Placement offerings structured as an LP or LLC, and are available for accredited investors only. Tax considerations associated with these types of investment programs are complex and vary with individual circumstances. At Exclusive Advisors, we can help coordinate and review the options available with you, your CPA, and/or qualified intermediary to determine which program best fits your individual situation.
POTENTIAL TAX BENEFITS THROUGH
CONSERVATION EASEMENT PROGRAMS
To encourage the preservation (in perpetuity) of land with significant conservation values, Congress has provided substantial tax benefits for donations of qualifying conservation easements. The primary incentive is an income tax deduction under Section 170(a) and (h) of the Internal Revenue Code limited to ½ of your adjusted gross income.
These programs acquire and own a controlling interest in various unimproved real estate. Investor members are presented several investment strategies the sponsor affiliated Company believes are suitable for the property acquired and will provide an attractive risk-adjusted return. Investor members then vote to elect one of three options:
1. To develop the property pursuant to a development plan.
2. To donate a conservation easement on the entire property.
3. Defer action and continue to hold the property.
If the investor members vote to donate the property as a conservation easement, they may receive a current year tax deduction in the form of a non-cash charitable donation on program specific multiple for every dollar invested in the program.
POTENTIAL TAX BENEFITS THROUGH ENERGY TAX CREDIT PROGRAMS
In order to spur private investment in developing American energy and reduce our dependence on imports, unique and powerful tax advantages are afforded to direct investments in drilling American oil and natural gas wells.
Capital raised from investors is used to drill new developmental horizontal oil and/or natural gas wells on properties in close vicinity of existing, proven wells. Should you invest as an investor general partner, the investment can provide an attractive tax write-off ranging from 75% to 85% of every dollar invested that can be used to offset any type of taxable income or gain, including lowering your AMT by up to 40%. Once the program wells begin production and the energy commodity is sold, investors can enjoy an attractive long-term tax-advantaged monthly income for the life of the program.
POTENTIAL TAX BENEFITS THROUGH OPPORTUNITY ZONE FUNDS
Opportunity Zone Funds provide a unique opportunity to invest in tax advantaged opportunistic/value-add real estate targeting new construction and underutilized assets within transit-oriented and/or urban-centric Opportunity Zones.
The Opportunity Zones program was established by Congress in the Tax Cuts and Jobs Act of 2017 as an innovative approach to spur long-term private sector investments in low-income urban and rural communities nationwide. The program allows state governors to establish Opportunity Zones where new Opportunity Funds would make targeted investments. (see map)
Essentially an investor may reinvest a portion of a realized gain, or the entire capital gain from the sale of any existing investment (stocks, bonds, real estate, business, art, etc.). This allows the investor to defer and reduce their capital gain tax liability and potentially face no capital gains or depreciation recapture on Opportunity Zone investments held for at least 10 years. The typical minimum investment of these programs is $100,000.
Unlike other tax benefit strategies, a taxpayer need only reinvest their gains, not the entire proceeds from a sale of assets. An investors original principal (cost basis) is separate and can be re-deployed as the investor sees fit. Other tax benefit strategies that defer gains also require reinvestment of all proceeds (e.g., like-kind exchanges, involuntary conversions, etc.). With Opportunity Zone investments, any gain can be deferred including long-term, short-term, ordinary and Section 1231.
The key to understanding this strategy you should focus on the word “deferral” and then visualize the original deferred gain and the growth on that gain in separate buckets.
According to the latest IRS guidance, the program works like this: Assume you recognize a $1,000,000 profit (gain) on the sale of a business, investment property, or stock sale. You are given a 180 day window from the date of the sale to invest a portion of, or the entire amount of the gain in an Opportunity Zone fund. By doing this, you can postpone or defer paying taxes on that invested gain until 2026. If you hold the Opportunity Zone fund shares to 2026, your deferred gain is reduced by 10%, to $900,000. In year 2026, the deferral on the original gain ends and you will have to pay capital gain taxes on the $900,000 deferred gain. That’s bucket number one.
Bucket number two is much more interesting. While the deferral and reduction in gain is a nice benefit, the real economic benefit of the Opportunity Zone program kicks in if you hold the Opportunity Zone fund shares for at least 10 years. If, for example, your original Opportunity Zone fund investment value grows from $1,000,000 to $3,000,000 after a 10 year hold; there will be no depreciation recapture and you will owe NO taxes on the $2,000,000 additional gain when the Opportunity Zone fund is liquidated.
POTENTIAL TAX BENEFITS THROUGH 1031 DST REPLACEMENT PROPERTIES
Section 1031 of the Internal Revenue Code provides an effective strategy for deferring the capital gains that may arise from an investment property sale. By exchanging the property for like kind real estate, property owners may defer their tax and use all of the proceeds for the purchase of replacement property. Like kind real estate includes business/investment property but not the property owner's primary residence.
Exclusive Advisors provides access to a wide variety of 1031 DST replacement sponsor-affiliated programs for a property owner to choose from. Unlike traditional Tenant-in-Common or TIC replacement property, we exclusively recommend replacement properties structured as DSTs or Delaware Statutory Trusts. The DST structure creates a passive replacement opportunity that takes all decision making out of the hands of the investor and places it into the hands of a sponsor affiliated trustee.
There are many advantages of a DST structured 1031 replacement program. Costs to the investors participating in the DST are much lower than the costs of a TIC program. In a DST program, investors do not need to incur the annual costs of maintenance and qualification of a special purpose LLC to hold their real estate interest. In addition, DST investors are not required to execute a guarantee or indemnities. Furthermore, because all management authority in a DST is vested in the sponsor affiliated trustee, there is no risk of investors being held hostage by a "rogue investor", as has occurred too often in TIC situations.
Other advantages of a DST 1031 program structure include:
Create an attractive monthly income stream without the burden of active real estate ownership.
Ability to choose properties in many sectors including retail, office, industrial, medical, self-storage, multifamily and royalties & mineral rights.
Original property cost basis remains in-tact with replacement property maintaining the potential for a step up in basis upon the owners death.
Low minimum investment amounts (typically $100,000) give you the ability to identify and exchange into a multiple asset portfolio of replacement properties.
Ability to choose from highly leveraged, moderately leveraged, or no leverage offerings.
Benefit from professional real estate expertise, including acquisition, financing, property management and asset management.
Tax reporting for DSTs via substitute 1098/1099 not K-1.
To avoid incurring a taxable event, exchange investors may not have actual or constructive receipt of the proceeds from their relinquished property sale. For this reason, a Qualified Intermediary or "QI" is needed to coordinate the exchange.
Disclaimer: Keep in mind this tax considerations are applicable as the current tax laws have been written. These exemptions have been around for some time, but are subject to congressional change and IRS guidance.