Exchange Your Long-Awaited Liquidity Event Into Real Estate Investments and Pay No Taxes Today
As you wait for the coveted liquidity event or have experienced one in the last 180 days – you may be able to actually keep the vast majority of your money and keep it invested, instead of sending 30-50% of it off to the IRS and your state(s).Getting to a liquidity event is hard enough and watching so much of that money disappear is frustrating. Fortunately, the new tax legislation has provided an “opportunity” to defer this tax and also build the value of your investment on a tax-free basis for the next 10+ years. As part of the most recent Federal tax billed which passed in late 2017 and became effective 1/1/18, there is a newly created tax incentive called “opportunity zone investing.” The Tax Cuts and Jobs Act provided for this benefit, and it could be a huge benefit for you.
What is Opportunity Zone Investing?
Here is an example of how it works:
- In 2016, you exercised your options with the help of the ESO Fund and the total amount you borrowed was $250,000, of which $200,000 was your option price and $50,000 was your AMT due.
- As of today your stock is worth $2,000,000 - $200,000 of original investment and $1,800,000 of untaxed gains.
- If you sell – you will need to pay capital gains tax on $1,800,000 which could be as high in states like CA where capital gains and ordinary income are taxed at the same rate. See this link for more information on how to recover the $50,000 of AMT credit.
- If you invest the $1,800,000 of untaxed gains into an opportunity zone fund, your capital gains taxes are definitely deferred at the Federal level and potentially even the state level (consult your state laws or ask us!)
Now let’s assume you invest the $1,800,000 into a diversified O-Fund to invest in real estate and in 10 years that investment is worth $4,000,000.
- You pay NO TAX on the additional $2,200,000 of gain in the O-Fund at the Federal level and potentially the state as well.
- Your initial deferred gain of $1,800,000 is now only taxed at 85% of the gain (15% forgiveness) if your opportunity zone investment is held for at least 7 years (10% forgiveness for 5 years) so you save taxes on that as well.
- This could increase your after-tax rate of return by up to 94% (depending upon your tax rate).
Can You Control Your Tax?
It should also be noted that you do not need to invest the entire gain to achieve the tax benefits. You could, for example, invest $1,000,000 of the $1,800,000 from the example above and defer taxes on the $1,000,000. You would still owe taxes on the $800,000 in this example, but at least you have controlled how and when you paid the tax.
Need More Information?
For more information on Opportunity Zone Investing, please contact Jordan Taylor of Vestboard (480) 544-6230. Note that ESO has no formal affiliation with Vestboard or any Opportunity Zone fund. We merely provide this information as a public service and it is solely your responsibility to conduct due diligence before investing in any Opportunity Zone fund.