RPF0654-A_New_Legal_Tax_Scheme_to_Help_You_Save_Capital_Gains-Qualified_Opportunity_Zones
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00:00:29.960 | Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge,
00:00:35.400 | skills, insight, and encouragement you need to live a rich and meaningful life now while
00:00:39.880 | building a plan for financial freedom in 10 years or less.
00:00:43.440 | Today on the show, we're going to talk about capital gains taxes.
00:00:46.480 | I'm going to give you kind of a mini lesson, a mini lecture on capital gains taxes, and
00:00:51.240 | then we're going to focus a good bit on discussing opportunity zones.
00:00:55.600 | I should have done this episode months ago, and I thank you for your patience with me.
00:01:01.400 | I should have done this if you remember the three-part series that I did on saving taxes
00:01:05.400 | by moving to a no-income tax state, saving taxes by moving outside of the United States,
00:01:09.920 | saving taxes by moving to Puerto Rico.
00:01:11.600 | I should have done this episode immediately the next day, but all of the busyness and
00:01:16.080 | challenge in my own personal life of a new baby, I simply wasn't prepared to do it.
00:01:19.800 | So thank you for your patience, but I'm ready to do it now.
00:01:22.480 | And today I'm going to talk about opportunity zones because opportunity zones are a newly
00:01:26.180 | created scheme by the IRS or by the legislators, I guess I should say, out of the 2017 Tax
00:01:33.280 | Cut and Jobs Act.
00:01:35.520 | And they are an opportunity for you and for me that could help us to save on capital gains
00:01:41.740 | taxes.
00:01:43.360 | Let's talk a little bit about capital gains taxes first.
00:01:47.840 | In many ways, capital gains taxes are less offensive to us than ordinary income taxes.
00:01:55.860 | But in some ways they are harder for us to avoid, which is a real challenge when it comes
00:02:00.620 | to planning.
00:02:01.620 | As I discussed in the three-part series, you can eliminate legally your ordinary income
00:02:07.820 | taxes by moving from a certain state by moving to a state that doesn't have ordinary income
00:02:12.760 | taxes.
00:02:13.760 | You can reduce or eliminate your ordinary income taxes on your income by moving outside
00:02:21.100 | of the United States.
00:02:22.100 | And I should specify that this show, especially the opportunity zones, will be exclusively
00:02:26.900 | applicable to US persons.
00:02:28.420 | The first part where I talk about capital gains taxes will be applicable to non-US persons,
00:02:33.400 | but the second half of the show is exclusively applicable to US persons.
00:02:37.180 | But US persons can minimize their ordinary income taxes by moving outside of the United
00:02:42.420 | States or potentially by moving to Puerto Rico or ultimately by potentially renouncing
00:02:47.500 | US citizenship and thus eliminating their burden for US income taxes while also simultaneously
00:02:54.180 | eliminating the privilege of being able to live and work inside of the United States.
00:02:59.980 | But capital gains taxes are a little bit harder to avoid because everybody faces capital gains
00:03:06.300 | taxes and they cannot be eliminated by moving outside of the country.
00:03:10.620 | I actually need to correct something that I did in that series of shows where I erroneously
00:03:15.060 | discussed capital gains taxes in conjunction with the foreign tax credit and I stated that
00:03:21.780 | you could simply offset your capital gains taxes if you're paying them abroad.
00:03:26.940 | I was corrected by a reader, sorry, a listener, that I was incorrect in that assessment and
00:03:32.340 | I went back and researched it and I was wrong.
00:03:34.260 | It's much more complex.
00:03:35.260 | I don't want to go into a detail right now, but just know that I made a mistake in that
00:03:40.140 | show about being abroad.
00:03:43.740 | So with capital gains taxes in general, they're harder for US persons to avoid.
00:03:50.300 | Now in some ways there are better planning opportunities available for capital gains
00:03:55.660 | taxes in order to reduce them and minimize them, etc.
00:03:59.460 | First of course we can be thankful that capital gains taxes are due at a lower rate than the
00:04:06.420 | rate that is assessed on ordinary income as things stand right now, as I record this on
00:04:11.220 | July 17, 2019.
00:04:14.380 | The current capital gains tax rates are generally no higher than about 15% for most people.
00:04:21.940 | If your overall ordinary income tax bracket is either the 10 or 12%, if your highest marginal
00:04:29.340 | bracket is either that 10 or 12% bracket, then some or all of your capital gains might
00:04:33.940 | not even be taxed at all, be taxed at a 0% rate.
00:04:37.340 | And then there is a 20% tax rate that comes in when taxpayers hit the 37% ordinary tax
00:04:46.300 | rate, which kicks in at about $425,000 of income for a single person, $479,000 for married
00:04:53.940 | filing jointly, etc.
00:04:56.540 | Now there are a couple of other exceptions.
00:04:58.560 | For example, the most important exception is that sales of some small business stock
00:05:04.020 | can be taxed at a 28% rate, sales of collectibles can be taxed at a 28% rate, and there is a
00:05:11.100 | 25% rate that applies to unrecaptured Section 1250 gain from selling Section 1250 real property.
00:05:18.180 | But for most of us, we're either in a 15 or 20% capital gains tax rate.
00:05:24.700 | Now this is really encouraging because it is far more reasonable to owe taxes at 15%
00:05:29.980 | than to owe taxes at 50%, at least in my opinion.
00:05:33.020 | 15%?
00:05:34.020 | Would I prefer it were 0%?
00:05:35.860 | Yeah, but I'm happy to pay taxes for a limited level of government.
00:05:40.820 | I don't think income taxes make all that much sense.
00:05:43.420 | I know that the tax revenue has to come somewhere.
00:05:45.860 | Anything 10% range around that area, I don't think it's such a big deal.
00:05:50.860 | It's not nearly worth the level of planning and the investment of time and energy and
00:05:54.820 | money to get out of when you're dealing with something that's a 10% rate versus a 50% rate.
00:05:59.620 | But certainly we would like to minimize the amount of taxes that are due.
00:06:04.480 | So it's good that they're at a lower rate.
00:06:06.620 | That's a good helpful thing.
00:06:07.760 | Another thing that's very helpful about capital gains taxes is you have the opportunity to
00:06:14.020 | control when those taxes are due.
00:06:17.100 | That's extremely helpful.
00:06:18.980 | For example, let's say that you buy a house, a rental house, you rent it out.
00:06:22.260 | Now when you sell the house, if you realize a capital gain, you are going to pay taxes.
00:06:27.660 | But you can choose when you sell the house, which means you can choose when you're going
00:06:32.280 | to owe that tax.
00:06:33.280 | So that's another helpful thing about capital gains taxes versus ordinary income taxes.
00:06:37.920 | It's much harder for you to control when you receive income if you are working than it
00:06:42.820 | is when you sell an investment.
00:06:45.420 | Income there are all kinds of rules about when that income is going to be recognized.
00:06:48.420 | You can defer some of it.
00:06:50.260 | We just talked in the most recent show about yes, you can defer some of it into a 401k,
00:06:54.980 | thus deferring the tax liability for a long period of time.
00:06:58.420 | But now the law may change so that now it's got to come out within 10 years of your death,
00:07:03.780 | whereas previously you could defer it for longer.
00:07:06.060 | So we're always subject to rules as far as when you defer it.
00:07:08.500 | But with your own asset, you can choose when you buy it and when you sell it.
00:07:12.740 | No one can force you to sell an asset that has an embedded tax liability.
00:07:17.620 | So that's very, very helpful with capital gains.
00:07:20.380 | Capital gains assets can also often be capital gains taxes can also often be deferred with
00:07:26.740 | the like kind exchange rules.
00:07:28.960 | This is especially applicable in things like real estate or real property where you can
00:07:33.660 | defer the asset.
00:07:34.780 | For example, you could buy a rental house today for $100,000.
00:07:38.340 | It grows in value for $200,000.
00:07:41.900 | You have $100,000 value in the asset, $100,000 of gain that would be taxed when you sell
00:07:48.660 | it.
00:07:49.660 | But if you do a like kind exchange and exchange your $200,000 of rental property for a different
00:07:55.340 | rental property, you can defer that tax and you can actually do this through your entire
00:07:59.820 | lifetime.
00:08:00.820 | You can do this with life insurance.
00:08:02.900 | You can do this with annuities.
00:08:03.900 | You can do this with real estate.
00:08:05.260 | You can do it with some forms of tangible property and you can avoid the tax for a serious, an
00:08:10.340 | extensive amount of time.
00:08:11.540 | That's very, very useful.
00:08:13.140 | It's also useful if you can have an asset that you can then borrow on.
00:08:16.420 | For example, real estate investors routinely will defer the payment of their tax by doing
00:08:23.040 | a like kind exchange.
00:08:24.980 | And then in order to access money from their investment, they'll put a loan on the property.
00:08:30.100 | And because real estate loans are at such a modest interest rate, it's a very efficient
00:08:35.740 | plan.
00:08:36.740 | The interest is deductible.
00:08:38.500 | It's a modest interest rate.
00:08:39.820 | It's a very safe asset so that an investor who sells the $200,000 property can invest
00:08:46.780 | it into another property worth $400,000 and then pick up a $400,000 mortgage on that property,
00:08:53.260 | thus realizing a huge amount of money in their bank account that they can spend, but they
00:08:58.100 | have no taxable income because they've used a loan instead of a sale.
00:09:03.300 | So they haven't sold the property and spent the money because that would incur the tax.
00:09:07.500 | What they've done is they've taken a loan and money that you receive in the form of
00:09:10.940 | a loan is not taxable income.
00:09:13.260 | Then over time, they let their tenants pay off the debt and the tenants pay it off.
00:09:17.700 | The interest is deductible along the way.
00:09:19.740 | It's at a very modest interest rate and it works out pretty well.
00:09:22.460 | It's a pretty efficient system.
00:09:23.700 | You can do the same thing with something like life insurance.
00:09:25.420 | That's why you can access, if you have a lot of gain in a life insurance policy, you can
00:09:29.580 | take a loan against the cash values, the gain inside of a life insurance policy, and that's
00:09:34.620 | not taxable income to you because it's a loan on an asset.
00:09:38.380 | Whereas if you did cash out the policy, you sold the policy or cashed it out, then of
00:09:43.700 | course you would be realizing income, which would be taxable.
00:09:46.860 | And the big disadvantage of life insurance is in that situation, it would be taxable
00:09:50.220 | as ordinary income, not even at the more favorable capital gains rates.
00:09:54.720 | So capital gains taxes are relatively simple for you to control.
00:09:58.900 | And through tools like a like-kind exchange, you have the ability to defer the payment
00:10:04.220 | of those taxes until the future.
00:10:06.740 | Then you also have some benefits of capital gains assets if you hold them until your death.
00:10:12.380 | Most importantly, all most, I try not to say, I should say most, because maybe I'm just
00:10:17.540 | not thinking of something right now, but most capital gains tax, sorry, capital, capital
00:10:22.380 | assets, if you hold them until death can then receive a step up in tax basis by your beneficiaries,
00:10:30.100 | thus eliminating the tax due as long as we don't run afoul of estate tax rates.
00:10:35.300 | So the way this works, you own a, you own a rental property, you buy that rental property
00:10:41.320 | for $200,000, but you continue to own it for your entire lifetime.
00:10:45.980 | Perhaps you take a loan against it, spend the money, that's up to you, but you own it
00:10:49.100 | for your entire lifetime.
00:10:50.460 | Then when you die, that property is worth $1 million, but you leave that $1 million
00:10:55.660 | property to your children, your child.
00:10:58.540 | Well, your child will inherit that property and at the date of your death, that property
00:11:03.300 | will have a new tax basis assigned to it, which will be the value of the property at
00:11:10.060 | the date of your death.
00:11:11.060 | So let's say that value is $1 million.
00:11:13.420 | Your child keeps the property for a couple more years and sells it for $1,100,000.
00:11:19.700 | What would happen in this circumstance is your child would only owe in capital gains
00:11:24.620 | tax on the $100,000 of income, the $100,000 of gain from the date of death until the date
00:11:33.060 | of sale.
00:11:34.460 | The $800,000 of gain that you had embedded in the property would be wiped away by death,
00:11:41.540 | by the step up in tax basis.
00:11:43.820 | So this can work out really well.
00:11:44.980 | It's why when you're doing estate planning, you need to be really careful about what assets
00:11:47.820 | get sold and when.
00:11:49.300 | I have seen major tax bills from people who didn't thoughtfully approach their tax planning
00:11:55.740 | on their assets.
00:11:57.260 | If you have that $1 million property with a $200,000 tax basis in it, I would much rather
00:12:02.580 | see you keep it and take a half million dollar loan against it or a million dollar loan against
00:12:07.580 | it, it doesn't matter, to fund your needs than to see you sell it and have to pay capital
00:12:12.060 | gains taxes on $800,000 of gain if you just want to leave it and let your kids sell it.
00:12:17.360 | So appreciated assets, appreciated capital assets are usually good assets to leave behind
00:12:23.220 | to your children.
00:12:25.260 | And if you understood the flow of that logic, you can see why now there is much more value,
00:12:31.220 | especially if the rules do change in the future about the heritability of IRAs and the ability
00:12:36.940 | to do a stretch IRA, you can now see why we would start to walk away from the value of
00:12:44.600 | leaving behind IRAs for children and go back to the value of capital assets because we
00:12:51.020 | can completely eliminate the capital gains tax due by having your property receive that
00:12:57.080 | step up in tax basis at death.
00:12:59.600 | So these are some common ways, common and ordinary ways of dealing with capital gains
00:13:03.760 | taxes for US persons.
00:13:06.580 | But beyond these, there aren't a lot of ways to save, there aren't a lot of ways where
00:13:11.820 | you can lower it all that much.
00:13:13.820 | I think again, most people just have 15%, usually 20%, it's not so egregious and they
00:13:19.140 | just deal with it.
00:13:21.500 | But still, you're fairly limited and there aren't a lot of other things.
00:13:28.780 | These are the basic tools that are in a tool chest that I've just described to you.
00:13:32.660 | Well in come the concepts related to opportunity zones and this is fundamentally new, which
00:13:41.380 | is why it's important for us to discuss.
00:13:44.700 | An opportunity zone was, opportunity zones were created by the 2017 Tax Cut and Jobs
00:13:52.460 | Act.
00:13:53.460 | It took a while for them to be phased in because all of the different states had to respond
00:13:59.140 | with where in their states were actually going to be the opportunity, the designated opportunity
00:14:04.740 | zones.
00:14:05.740 | But let me describe first what the benefits are of your investing in an opportunity zone
00:14:11.420 | and I'll go back and explain a few more details with as far as what defines an opportunity
00:14:16.860 | zone and how to find out where it is.
00:14:19.660 | Basically an opportunity zone is a certain district or a certain geographic area, a census
00:14:26.720 | tract that qualifies as needing additional capital to be infused into it.
00:14:36.300 | So the definitions by the Internal Revenue Code, an opportunity zone has to have a poverty
00:14:42.380 | rate of at least 20% or it has to be a place that has a median family income of no more
00:14:50.140 | than 80% of the statewide median family income for census tracts within non-metropolitan areas
00:14:56.580 | or no more than 80% of the greater statewide median family income or the overall metropolitan
00:15:02.260 | median family income for census tracts within metropolitan areas.
00:15:05.980 | So these are the basic requirements.
00:15:11.340 | Then according to the law, up to 25% of the census tracts of each jurisdiction that met
00:15:16.620 | these criteria could be nominated and an additional 5% of each jurisdiction could qualify if it
00:15:23.020 | met a different set of income or geographic qualifications.
00:15:26.480 | So the details are not important.
00:15:28.420 | The thing is just simply to know that these are economically depressed or economically
00:15:31.860 | disadvantaged or not economically productive zones.
00:15:35.460 | And the idea is can we incentivize investors to go into these places and start new businesses,
00:15:44.260 | invest in new things if we incentivize them by saving on taxes.
00:15:49.860 | And so let's discuss carefully what you save on with taxes because this is very important
00:15:56.220 | and it could be a huge opportunity for some of you to save a significant amount of money.
00:16:02.220 | There are potentially three layers of tax benefits if you will invest in an opportunity
00:16:09.160 | zone, if you'll make an investment in an opportunity zone.
00:16:13.040 | The first thing is if you sell assets and realize a capital gain that would ordinarily
00:16:22.380 | be a taxable capital gain, you can defer paying that capital gain tax on those earnings until
00:16:32.580 | April 2027 if you can hold these investments through December 31, 2026.
00:16:41.020 | So this is important.
00:16:43.300 | First, if you have an asset and you sell it and realize a capital gain today, if you invest
00:16:52.300 | that money, that capital gain into an opportunity zone, you can defer the taxes that you owe.
00:17:01.780 | The second benefit is if you hold your opportunity zone investment for at least five years prior
00:17:13.160 | to December 31, 2026, you can reduce the tax liability that you owe on that deferred capital
00:17:23.380 | gain by 10%.
00:17:27.680 | If you hold the investment for a minimum of seven years prior to December 31, 2026, the
00:17:34.940 | tax liability can be reduced by 15% total.
00:17:39.480 | So the first benefit was that you could defer paying the taxes and that has a substantial
00:17:44.820 | benefit which we'll talk more about in a moment.
00:17:47.300 | The second benefit is you can reduce the taxes that you owe by potentially 10% or 15% but
00:17:54.040 | in this case 10% because we're pretty close here to that seven year mark.
00:17:59.240 | Yeah, we're over it now.
00:18:01.460 | So you can reduce your tax due by 10%.
00:18:05.460 | That's the second benefit.
00:18:06.680 | And then the third thing is if you make an investment in an opportunity zone and you
00:18:12.800 | hold that investment for at least 10 years, then you can expect to pay no capital gains
00:18:21.440 | taxes on any appreciation in the opportunity zone investment if you hold it for at least
00:18:29.960 | 10 years.
00:18:30.960 | You qualify for a permanent exclusion from the capital gains tax.
00:18:36.320 | That's for an investment that's made in the opportunity zone.
00:18:39.760 | Now let me give you a little bit of texture as to how valuable these particular benefits
00:18:47.080 | are because they could be very substantially very, very beneficial.
00:18:52.120 | Let's assume for analysis that you have an asset that has a $1 million embedded gain,
00:19:01.080 | a capital gain.
00:19:02.080 | You have a $1 million capital gain in an asset.
00:19:04.660 | This can be stocks that you own, real estate, business, doesn't matter.
00:19:08.000 | Any kind of capital gain asset, $1 million.
00:19:10.520 | Let's assume that you're going to be taxed on that $1 million at a 15% long term capital
00:19:15.560 | gains rate.
00:19:17.160 | So that means that you have a tax liability of $150,000.
00:19:22.120 | If you sell your asset and realize your $1 million of gain today, then you'll owe the
00:19:27.400 | IRS a check for $150,000 today.
00:19:31.680 | Well if you want to participate in an opportunity zone, here's how the numbers would work.
00:19:35.760 | The first thing that you can do is you can sell the asset and then you have 180 days
00:19:42.560 | to buy something else, to buy something that qualifies in an opportunity zone.
00:19:47.320 | This can be to start a business, it can be to buy real estate, there are a number of
00:19:49.520 | different investments that it could be.
00:19:50.520 | It could be even a fund, an opportunity fund, a fund that's being managed by somebody else.
00:19:54.920 | But you invest your $1 million into an opportunity zone investment.
00:20:02.960 | And we're going to assume that you maximize this program by holding things the maximum
00:20:07.560 | period of time.
00:20:09.200 | The first thing that you will save is you will be able to defer the tax until the year
00:20:15.680 | April, until 2027, until April 2027.
00:20:20.400 | That deferral means that the tax that you owe could be substantially reduced based upon
00:20:27.080 | the time value of money, especially based upon inflation and the effects of that.
00:20:32.680 | And also reduced by your being able to use the money yourself.
00:20:38.080 | So basically, instead of sending the $150,000 to the IRS this April, you get to wait seven
00:20:44.240 | years, yeah, seven years to send it to the IRS.
00:20:47.640 | Well, what is that worth?
00:20:49.480 | Potentially if you could invest the money, a lot.
00:20:51.440 | So $150,000 that you can invest today, starting with a present value of $150,000 for seven
00:20:58.760 | years.
00:20:59.760 | Let's say that you could just invest that into something, if you had the chance, you
00:21:02.920 | would don't because it's an opportunity zone.
00:21:04.520 | But let's just for the sake of comparison, say that you're investing it at 3% per year,
00:21:10.120 | no payments on it.
00:21:11.120 | Well, at the end of seven years, that's potentially $184,000.
00:21:14.820 | So you now have more money that you can use to pay the IRS.
00:21:19.560 | You have a little bit of extra.
00:21:20.560 | Instead of them taking the money and earning interest on it, you've been able to take the
00:21:23.920 | money and earn interest on it.
00:21:25.840 | Now additionally, you have the fact that inflation will be trucking away, reducing the value
00:21:31.600 | of the tax liability that you owe the IRS.
00:21:35.540 | If we use the same math, the same $150,000, let's assume that the value of that $150,000
00:21:42.440 | is being reduced by inflation and we do 3% for seven years.
00:21:46.280 | That means that in seven years, when you owe the tax, you're going to have to owe what
00:21:51.700 | in today's dollars you would need only $121,197 to pay because the value of the 150 in seven
00:21:58.260 | years at 3% inflation would drop to be 121.
00:22:01.480 | Now we don't know exactly what would happen with inflation, but it could be, you know,
00:22:04.920 | 3% is not an unreasonable number to use.
00:22:07.780 | So you can invest the money and earn benefit from it and you can pay the money back in
00:22:15.480 | the future with inflated dollars, which goes farther.
00:22:20.960 | That's pretty significant.
00:22:22.480 | That could be very, very significant for some of you because now you have an additional,
00:22:27.840 | basically you have an additional $150,000 of investment capital that you can deploy
00:22:33.120 | into an opportunity zone business.
00:22:35.400 | So that deals with the first one.
00:22:37.480 | Depending on the amount of capital gains that you have, that could be extremely substantial.
00:22:42.880 | If you add $10 million of capital gains and you went ahead and realized that $10 million
00:22:48.080 | of capital gains and you could take the $1.5 million that you owed and invest it into an
00:22:56.040 | opportunity, you know, invest the whole thing into an opportunity zone, but avoid paying
00:22:59.480 | the $1.5 million of tax, we're talking big numbers here, big opportunity.
00:23:03.440 | So if you have capital gains assets, you should seriously consider it.
00:23:06.440 | What's the second benefit of it?
00:23:07.600 | Well, the second benefit of it is that 10% reduction in value.
00:23:12.120 | So not only do you in the future get to pay back your taxes with inflated dollars instead
00:23:17.740 | of today's dollars, now you get to have the total tax bill reduced by 10% if you hold
00:23:24.780 | the investment for at least five years.
00:23:27.140 | So that lops off back to our $150,000 example, that lops off $15,000 from the tax bill.
00:23:34.000 | So in essence, now we had our tax bill of $150,000 dropped to $121,000 due to paying
00:23:39.240 | it back with inflated dollars.
00:23:41.360 | And then from $121,000, we can drop off another $15,000 due to the 10% discount.
00:23:46.660 | And now our total tax bill that we're going to owe is $106,000.
00:23:51.280 | Not bad.
00:23:53.060 | Pretty substantial, depending on what happens with that inflation expectation.
00:23:57.500 | Lowered our tax bill by a third from $150,000 to $106,000.
00:24:01.660 | That's good.
00:24:02.660 | Now then the third benefit is potentially very, very large.
00:24:06.920 | And that is the fact that your investment that you make in the opportunity zone, if
00:24:15.140 | you hold it for at least 10 years, it qualifies from permanent exclusion from capital gains
00:24:24.180 | taxes.
00:24:26.020 | So if you buy a million dollar investment, and that over the course of 10 years, you're
00:24:30.980 | able to force some kind of significant appreciation in your investment, some kind of significant
00:24:36.340 | change and go from $1 million to $5 million in value, you now can avoid paying the capital
00:24:45.020 | gains on the $4 million of gain, which at a 15% rate would be a $600,000 savings as
00:24:52.340 | long as you hold it for 10 years.
00:24:55.620 | Those are the tax benefits of investing in an opportunity zone.
00:25:00.340 | This could be substantial for the right set of facts.
00:25:03.940 | Now if you don't have any assets that have any significant gains built into them, then
00:25:11.580 | your benefit for this would be limited to the appreciation and the benefit to defer
00:25:17.020 | capital gains on your opportunity zone investment.
00:25:20.300 | You can still participate.
00:25:22.180 | You just won't get the benefit of saving on the embedded capital gains that you already
00:25:26.580 | have in your portfolio.
00:25:28.360 | But this could work out.
00:25:29.540 | You have money in a checking account, you go and instead of choosing to buy a house
00:25:33.940 | that's outside of an economic opportunity zone, you buy a house that's inside of an
00:25:37.740 | opportunity zone.
00:25:38.740 | Well, if you can make a substantial increase in the value of it, you can have that capital
00:25:43.380 | gain tax-free.
00:25:46.020 | But this really applies to those of you who have embedded gains.
00:25:50.100 | If you have an asset that has embedded gains, this is well worth your considering selling
00:25:55.060 | it and investing in a qualified opportunity zone in order to save on the gains that you
00:26:02.620 | have now.
00:26:03.620 | It's unlikely that there's going to be a better thing coming in the next few years.
00:26:08.060 | As I record this, again, July of 2019, I think this is a good time for you to look at your
00:26:13.260 | portfolio and consider your assets.
00:26:15.700 | Stock market values are historically high at the moment, which means that it's very
00:26:20.820 | possible that you may have some very significant gains in certain stocks that you own.
00:26:28.220 | Real estate markets for most of us throughout the United States are significantly high at
00:26:34.540 | the moment, which means that you may have some real estate that would be worth selling
00:26:39.860 | and resetting in some way.
00:26:42.300 | There are other interesting markets that are high.
00:26:44.580 | For example, you may be a cryptocurrency investor and you might have significant embedded gains
00:26:50.020 | in one of your cryptocurrencies that can qualify under this scheme as well.
00:26:57.300 | So the key thing is look at your portfolio and think about whether or not you have something,
00:27:02.620 | you have some kind of gain that you would like to go ahead and use in this particular
00:27:07.940 | scheme.
00:27:10.620 | Here are the specific rules from the legislation that qualify a certain gain for the investment
00:27:19.300 | into an opportunity zone.
00:27:21.740 | First, the gain is treated as a capital gain for federal income tax purposes.
00:27:26.740 | If so, it's eligible for deferral.
00:27:27.980 | It has to meet all three of these conditions.
00:27:29.460 | Number one, the gain is treated as a capital gain for federal income tax purposes.
00:27:33.860 | Number two, it would be otherwise recognized before January 1, 2027, if not applying for
00:27:41.220 | deferral, which means you would otherwise get it from the sale of the asset.
00:27:45.820 | And number three, it does not arise from the sale or exchange with a related property.
00:27:51.980 | So this can include short-term capital gains, long-term capital gains, net section 1231
00:27:58.020 | gains, unrecaptured section 1250 gains.
00:28:02.660 | Doesn't matter.
00:28:03.660 | All your gains will retain their identification, are they short-term, long-term, long-term
00:28:08.220 | for the entire portion of the deferral.
00:28:10.800 | So you can see here how, depending on the specific asset, it could be even more significant
00:28:16.940 | of savings for you.
00:28:17.940 | For example, let's say that you're selling some collectible or short-term capital gain
00:28:22.420 | asset that can qualify and your rate would be higher than 15%, thus making all the math
00:28:28.820 | that I did even more beneficial.
00:28:31.140 | Or perhaps you're in a 20% rate plus the 3.8% Medicare surcharge tax.
00:28:35.300 | So you have a 23.8% tax on your long-term capital gains, qualifies, and all of it would
00:28:40.620 | be saved.
00:28:41.980 | Then you have to invest it.
00:28:43.620 | You have to identify an investment and invest the money into an appropriate opportunity
00:28:48.140 | zone investment within 180 days of your realizing the capital gain.
00:28:52.620 | So let's talk about what your options are.
00:28:54.420 | You can do this directly or you can participate into an opportunity fund.
00:28:59.620 | The legislation specifically allows for the creation of qualified opportunity funds.
00:29:06.200 | And these qualified opportunity funds are being developed now.
00:29:10.100 | They are available now.
00:29:11.300 | I'm not going to name any names or discuss that.
00:29:14.060 | It's easily available to you with a search of the appropriate internet and resources.
00:29:22.020 | But they are there and you can invest in an appropriate qualified opportunity fund.
00:29:26.180 | So you don't have to be the active manager.
00:29:28.700 | You don't have to be the one specifically identifying the investments.
00:29:31.460 | You can pay a manager by investing in a qualified opportunity fund and you'll retain all of
00:29:36.180 | your tax benefits.
00:29:38.620 | You will notify the IRS of your investment using tax form 8949 and your schedule D when
00:29:46.140 | it comes time to file this year's taxes or whenever you do this.
00:29:49.140 | And then when the taxes become due in the long term, then you'll pay those taxes.
00:29:53.980 | And then you will, again, as long as you hold the investment for the 10 years, you can potentially
00:29:57.780 | eliminate your capital gains tax liability from whatever appreciation you can earn from
00:30:01.700 | your quality opportunity funds investment.
00:30:03.780 | A couple of interesting questions to discuss, some frequently asked questions.
00:30:07.980 | First, there are opportunity zones in every state and I think it's a total of two zones
00:30:16.500 | that were added late last year in Puerto Rico.
00:30:19.940 | So you can also do this in Puerto Rico, which could, and potentially if you're using Puerto
00:30:23.700 | Rico to improve your tax situation like we discussed in the show on Puerto Rico, it's
00:30:29.140 | possible that you can additionally do this in Puerto Rico and use that as a part of your
00:30:35.500 | overall planning structure.
00:30:37.580 | So it's worth your considering there.
00:30:39.620 | But there are opportunity zones and funds in every single state.
00:30:45.140 | And some of these areas are very interesting.
00:30:47.220 | There are places out in the country, there are places right in the middle of the city.
00:30:50.180 | Now you will have to look up easily findable online.
00:30:52.740 | You can look up one of the maps and see where the funds are.
00:30:55.620 | You can find the lists of the ones that are in your state.
00:30:58.160 | There's no requirement that you invest in your state of residence.
00:31:00.980 | You can invest in any state.
00:31:02.840 | So if you want to invest in California or you want to invest in Mississippi, there are
00:31:07.580 | opportunities in each and every state.
00:31:10.020 | All of these tracks, the census tracks are designated.
00:31:13.740 | They've been identified by your state government.
00:31:16.860 | Everything has been done and is available.
00:31:19.300 | So take a look around the map, take a look at some of the lists and see if there are
00:31:21.980 | anything, any opportunities that are interesting to you.
00:31:25.180 | If you're starting a business, you should or think that you're going to be starting
00:31:28.560 | a business, you should seriously consider locating that business in one of these opportunity
00:31:32.980 | zones so that it qualifies for this potential exclusion on capital gains.
00:31:39.660 | There are a number of questions that are associated with exactly how to do this, but you can do
00:31:43.820 | it.
00:31:44.820 | So if you're starting a business, and especially you should consider this if you're starting
00:31:48.340 | a business that has the potential for a massive growth in capital value, you should consider
00:31:54.760 | locating it within a qualified opportunity zone.
00:31:57.420 | Many people look first at real estate, but I don't think, I think there's opportunities,
00:32:01.300 | there are opportunities there clearly, but I don't think that should be the primary opportunity.
00:32:05.780 | I think the biggest opportunity with any kind of tax scheme like this is if you're involved
00:32:10.260 | in something where there is huge upside potential.
00:32:13.740 | So if you're doing a tech startup or you're doing some kind of business that has the potential
00:32:18.140 | for a massive level of appreciation, think carefully about locating yourself and qualifying
00:32:25.380 | yourself as a qualified opportunity zone business.
00:32:29.780 | I think that's everything I really want to cover in this particular show.
00:32:33.740 | There are a number of questions that I could imagine being asked, there are plenty of things,
00:32:38.140 | details, but I think I'd like to keep this show just focused on the big picture idea
00:32:42.620 | and simply close by telling you this.
00:32:45.260 | There are a few things that are genuinely new and as they come along, things change.
00:32:49.980 | In the most recent show, I talked about the change of something that's been around for
00:32:53.460 | decades and hasn't changed yet, but it potentially could change and how utterly devastating that
00:32:58.340 | is.
00:32:59.340 | But this is the flip side.
00:33:00.340 | This is a change that potentially you could use and I think this is the kind of thing
00:33:04.820 | with the kind of scale that I feel is, it's the kind of scheme that I think I would be
00:33:10.300 | confident in participating in because it's of a short enough timeline.
00:33:14.620 | It's clearly specified enough that this one should work out.
00:33:18.020 | It's not just a long open-ended promise, a naked promise to pay kind of thing from the
00:33:25.100 | government.
00:33:26.100 | This is of a specific period of time and so I think this can work out.
00:33:32.460 | This is fundamentally new.
00:33:34.140 | So this is not in last year's textbooks, this is fundamentally new and it is fundamentally
00:33:39.580 | a potential for you that could be very, very significant.
00:33:44.380 | So if you qualify, if you want to start a new business, do make some new investments,
00:33:48.860 | look to do those things in an opportunity zone.
00:33:51.300 | If you have assets that have high embedded capital gains, if it's a good time to sell
00:33:55.780 | those assets and if you'd like the potential to save on your capital gains taxes, potentially
00:34:00.100 | up to a third or so of the money that you're going to owe the IRS, this could be one way
00:34:04.420 | to do it and I hope that this helps you to save money.
00:34:08.740 | I guess I'll just close with an ad to say this is a good time and a good thing to consider
00:34:14.160 | as you make your own adjustments in your life to pursue your vision of whatever financial
00:34:20.220 | independence and financial freedom looks like and means to you.
00:34:25.460 | And I would invite you to consider purchasing any of my courses that may help you with some
00:34:28.700 | of these.
00:34:29.700 | But for example, let's say that you are interested in moving from a place that has, you're interested
00:34:36.660 | in starting a new business.
00:34:37.940 | Well, by moving to a place that is located within an economic opportunity zone, you could
00:34:45.840 | potentially have a decrease in your overall living expenses.
00:34:50.440 | That could be helpful to you because these are considered to be less wealthy, more struggling
00:34:55.800 | areas.
00:34:56.800 | So you can move in, you could potentially find a place to live that cost you less and
00:35:00.680 | you could be part of a community revitalization in that process.
00:35:05.360 | And while you're at it, you can build your new business and enjoy some of the benefits
00:35:09.280 | of the removal of capital gains taxes on that new business.
00:35:13.520 | So this is the type of thing that could allow you to have just one more benefit along the
00:35:18.560 | way.
00:35:19.560 | And when you start stacking all these benefits, that's where you get the really great opportunities.
00:35:23.440 | Let's say that real estate prices are high in your area right now, you go ahead and sell
00:35:27.480 | your house.
00:35:28.480 | Well, you have some tax-free money there from the sale of your house and you can move to
00:35:32.320 | a place that's cheaper, perhaps a place that's safer than where you live now, although that
00:35:35.720 | you should be careful there with regard to the overall, you know, what you're moving
00:35:41.280 | into.
00:35:42.280 | And for context there, these are based on census tracts.
00:35:45.000 | So some of these places are geographically huge and some of them are geographically tiny.
00:35:49.160 | If you go to the economic opportunity zones that are located in New York City, it's a
00:35:54.040 | geographically tiny part of the world.
00:35:57.480 | If you go to one of the economic opportunity zones that's located in Wyoming, it's geographically
00:36:01.720 | huge.
00:36:02.720 | So consider that in your movements.
00:36:05.520 | But this could be a way for you to get multiple benefits.
00:36:07.640 | That's my point.
00:36:08.640 | Consider purchasing some of my courses, see if any of them help you out.
00:36:10.560 | I've got three available for sale right now at radicalpersonalfinance.com/store.
00:36:13.080 | I have a guide to career and income planning.
00:36:15.920 | Why not go and get a dream job, start a dream business while you're at it?
00:36:18.720 | I have a guide to how to survive and thrive during the coming economic crisis.
00:36:23.880 | Why not move someplace safe?
00:36:25.240 | Why not move someplace that you want to be and put down some roots?
00:36:28.160 | Why not establish yourself in a place that is economically has more potential for the
00:36:34.720 | future?
00:36:35.840 | It might seem strange to say we have to move to an economic opportunity zone, but you know
00:36:39.640 | as well as I knew, I know, that any kind of official system like this is going to have
00:36:44.960 | inefficiencies in it where you can find a wonderful place within an economic opportunity
00:36:49.720 | zone.
00:36:50.720 | And so that could be helpful to you as well to set up a place that will insulate you from
00:36:55.000 | the potential for economic crisis.
00:36:57.720 | And then also of course I have how to borrow money and never pay interest and do it safely
00:37:03.440 | using credit cards, which is probably my favorite course to help people have access to capital
00:37:08.960 | in a safe way when they need it for things like this.
00:37:12.520 | Go to radicalpersonalfinance.com/store.
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