Thanks to a 10-year bull market, U.S. individuals are sitting on portfolios filled with appreciated stock positions. The S&P 500 has appreciated nearly 240% over the last 10 years, which means a $100,000 investment would now be worth roughly $340,000, creating $240,000 of unrealized capital gains.
Other investors, such as those who receive company stock as part of their compensation or through acquisition, may have one investment with an outsized weighting — this concentration may warrant portfolio rebalancing. To use a prominent example, Amazon stock has tripled in just the last three years.
Historically, selling these positions would trigger a material tax liability — the top tax bracket is 23.8% (plus applicable state tax) for long-term capital gains. Often, the prospect of a sizeable tax bill has stopped investors from taking action.
So, how should investors think about optimizing the tax-efficiency of their capital gains? Thankfully, the Tax Cut and Jobs Act of 2017 provides investors a new opportunity to significantly mitigate their tax liability by investing in Opportunity Zones.
Why should I invest my capital gains in Opportunity Zones?
Opportunity Zone investing can be a smart and prudent way to diversify away from lofty public markets equity exposure into real estate while also deferring and reducing the normal 23.8% tax on those booked gains.
The program offers the potential for capital gains tax breaks on any recently sold investment — including stocks, bonds, a private business, or real estate — so long as the gains are rolled into a Qualified Opportunity Fund (“QOF”) within 180 days of the gains being realized.
How do Opportunity Zone investments help me defer or reduce my taxes?
Defer taxes on capital gains reinvested in a QOF until December 31, 2026 or the date on which the Opportunity Zone investment is disposed of, whichever is earlier.
Anastasi points out that the potential tax benefits are magnified by higher investment returns, making investment selection paramount.
In its approach to investing in Opportunity Zones, Cadre uses a strategy of proactive market selection, working with top-tier operating partners, and serving as an active fiduciary for our investor partnerships. We believe the optimal Opportunity Zone investment strategy and deal structure align with our existing approach.
Efficient Diversification. Access a series of Opportunity Zone investments with data-driven diversification across select markets and alongside experienced operating partners. Cadre seeks to avoid the risks associated with single asset, market, or developer strategies.
Experienced Investment Team. While the program’s tax benefits are highly attractive, investments must be grounded in the merits of the real estate. The Cadre team brings over $50 billion of collective transaction experience at top tier investment firms, including roughly $10 billion of development experience across the U.S.
Experienced Operator and Developer Network. Cadre has developed a pipeline of actionable opportunities within our target Opportunity Zone markets, driven by our network of over 300 local operating partners.
Single-Asset Fund Structure. Since inception, Cadre has focused exclusively on structuring single-asset funds, which we believe is the optimal structure for Opportunity Zone investing. Leading law firms have noted that a traditional commingled fund structure with multiple properties is not a straightforward fit for the Opportunity Zone Program and that instead, fund manager smay wish to create a separate fund for each property.
To learn more about the Cadre Opportunity Zones Program or to view the company’s current Opportunity Zone offerings, please request access to the Cadre platform.
Economic Innovation Group, “Opportunity Zones Tapping Into a $6 Trillion Market, “ March 21, 2018.
“Invest in the asset class that has outperformed the S&P 500 over the last 20 years” refers to the cumulative return (with full reinvestment of dividends) of an investment in the FTSE NAREIT US Real Estate Equity REITs index as compared to investment in the S&P 500 (using S&P Total Return data from CBOE) for the period from December 2000 – December 2018. Investments with Cadre are in private real estate interests and are materially different from investment in US equity REITs; real estate return data should not be used to estimate the return of Cadre investments.
Insights by Cadre, ”Opportunity Zones 101: Guide to What Investors Need to Know,” Feb. 6, 2019.
The views expressed above are presented only for informational and educational purposes and are subject to change in the future. Cadre makes no representations, express or implied, regarding the accuracy or completeness of this information, and the reader accepts all risks in relying on the above information for any purpose whatsoever. These materials are not intended to provide, and should not be relied upon for investment, accounting, legal or tax advice. Additionally, these materials are not an offer to sell or the solicitation of an offer to buy any securities or other instruments. Actual transactions described herein are for illustrative purposes only, are presented as of underwriting and are not indicative of actual performance, and were selected based on objective, non-performance factors such as asset-type, geography or transaction date, among others. Certain information presented or relied upon in this presentation has been obtained from third party sources believed to be reliable, however, we do not guarantee the accuracy, completeness or fairness of the information presented.
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