The finest days of QOZs are still ahead of us, even though rising inflation and interest rates raise the price of doing business in the real estate market. So what is the connection between inflation and opportunity zones? What if the news is even good?
Inflation soared to 9.1%, a four-decade high, in June 2022. There is little indication that inflationary pressures will stop being the primary concern of most investors anytime soon, even though it has decreased significantly (to “just” 7.1% in November).
Of course, the cost of living is far from the only issue we are now confronting. The 2022 inflationary spiral has immediately caused several interest rate increases, which have partly directly caused a double-digit decline in the stock market.
Is assistance coming for the American economy? Not to hear the majority of economists discuss it. The only point of contention among those who don’t think we’re now in a recession is how long it will stay and how severe it will be. Instead, they predict one will occur within the next six to twelve months.
What investors should know now about opportunity zones and macroeconomic volatility, given this background? Is it possibly conceivable that inflation and opportunity zones have a beneficial relationship? The answer is unquestionable, yes, to the extent that real estate investment is acknowledged as one of the strongest historical hedges against inflation.
Opportunity zones, also known as qualified opportunity zones or QOZs, were established by the Tax Cuts and Jobs Act of 2017. They range from rural regions with little economic development and few services for their residents to densely populated cities with neighborhoods and industrial areas in transition.
Although many investors are at least somewhat motivated by the prospect of seeing their money contribute to the community’s growth, the favorable return on such investments, coupled with numerous tax benefits, continues to be the main driving force. Many CPAs and investors find tax deferral until 2026, typically deemed payable in 2027, advantageous for tax planning because the appreciated value in an opportunity fund is 100% tax-free if held to term and all IRS regulations are met.
Congress is already considering keeping the OZ benefit in place for at least another two years. While it may be challenging to predict QOZ investment returns shortly, these investments are not meant to be made for a short period and shouldn’t be treated as such. The OZ program must be seen by investors with sizable capital gains as intended: as a tax incentive program that allows investors to postpone substantial capital gains from any investment that has appreciated sufficiently.
Whether your profits came from a bubbly stock market, the sale of a closely held company, or a real estate transaction that benefited from years of record low borrowing rates, it doesn’t matter how they were made. The OZ funds’ tax advantages protect from a potentially crippling tax burden.
For the foreseeable future, increased interest rates are easily envisioned as increasing the dollar worth of capital gains. The importance of investing in an OZ fund to decrease current tax exposure, with the long-term potential for eliminating it, cannot be underestimated, especially when combined with the likelihood of increasing federal and state tax rates.
