#92 - Opportunity Zones for Passive Income: Unlock Tax Savings and Growth with Nathan Sosa

[00:00:00] Welcome back to Passive Income Pilots, everyone. Thanks for tuning in again. Tait Duryea here with Ryan Gibson. How you doing man?

[00:00:08] I'm getting excited. Today we have a very special guest and we're going to introduce a technical topic that you need to be aware of as an investor because you need to know all the tools in the tool chest and one of the things that we're going to talk about today is Opportunity Zones, which if you have a big stock gain or a sale of a business or a sale of real estate and you're going to have a big tax bill, you might want to tune into this.

[00:00:30] because we're going to go through a way that you can defer all of those gains.

[00:00:35] Yes.

[00:00:35] And I know the stock rallied right after election day. Hopefully that stays up.

[00:00:41] Yeah.

[00:00:42] This is a policy that Trump brought in back in 2017 with the Tax-Cut-and-Jobs Act. It's the Opportunity Zones. I know everybody's heard of them. Not many people understand how they work, to be honest. I got a lot of clarity today, which was fantastic.

[00:00:57] I see this sticking around for a while or getting renewed. So this is going to be an investment strategy that you're probably going to have for the next decade.

[00:01:04] Yeah. It was going to sunset in 2026 and very likely, just like we think bonus depreciation might come back, we're hoping it comes back. This is likely something, regardless of what happens with bonus, very likely that Opportunity Zones get extended past 2026.

[00:01:20] So it gets technical. Lock in for another one of those episodes that you might have to listen to twice, but we do our best to keep it simple and make it understandable. We have Nathan Sosa on today. He's a CPA with Hall CPA firm.

[00:01:34] We had Brandon Hall on the show back on episode 75, talking about real estate professional status. Brandon Hall is the founder of Hall CPA. It's the firm that I personally use for my tax strategy now. I think they've been fantastic. Nathan Sosa is actually my personal tax strategist and the guy that I meet with every quarter to talk about what's happening in my financial life and the tax implications of those things moving forward.

[00:01:59] And what sort of strategies we want to put in place proactively to reduce my and my wife's taxable income before we get slapped with a big tax bill. So I've been loving working with him. I'm very excited to have him on to break down OZs today.

[00:02:14] But before we go into the show, I want to stress Tate and I and Nathan, we're not giving any tax legal or investment advice. This is just friendly conversation for you to start thinking about things that maybe you haven't thought about, but don't take this

[00:02:29] advice to the bank. We're not CPAs, Tate and I, we're not financial advisors. We're not licensed professionals. We're hosting this show because we want to expose our listeners and the aviation community to practical knowledge and insights on investing. And so this is no different, right? So, but don't, don't go home and whatever we say goes on the, you have to do your own due diligence. You have to have your own CPA.

[00:02:50] Everyone's tax situation is different. So you have to be consulting with a professional that's one-on-one with you looking at your particular situation. So this is so that you can have that conversation with your professional.

[00:03:02] Yes, exactly. So with that, let's get into the show.

[00:03:11] Welcome to Passive Income Pilots, where pilots upgrade their money. This is the definitive source for personal finance and investment tactics for aviators.

[00:03:21] We interview world-renowned experts and share these lessons with the flying community.

[00:03:27] So if you're ready for practical knowledge and insights, let's roll.

[00:03:31] Nathan, thank you so much for joining us.

[00:03:33] No, thanks for having me, guys. I'm excited to talk about QOZs today.

[00:03:37] Yeah. You know, I feel like it's a topic that has been around for a long time, but unless you're really involved in real estate development, it's not a concept that's been really fleshed out for investors.

[00:03:48] And so I'd like to kick things off by saying, you know, why should we pay attention to these?

[00:03:54] We care because... So first off, the reason we care is because they're great tax hacks.

[00:03:58] They're one, great deferral strategies.

[00:04:01] Two, you get the benefits of real estate, bonus depreciation, all that stuff in the meantime.

[00:04:06] And three, you get to step up without having to die.

[00:04:09] So I guess that's like the overall benefits here, right?

[00:04:12] It's like, that's like, you actually get the bit, like, it's really one of the few things, like one of the few opportunities you get to step up without having to pass away or anything like that.

[00:04:20] Basically, hold the interest for 10 years and you get a step up.

[00:04:24] Now, to achieve that, we've got to follow the right steps and methodologies.

[00:04:29] I have clients come to me all the time that go, cool, I've got like some, I've got properties in a qualified opportunity zone.

[00:04:37] What can I do?

[00:04:38] And it's like, oh, if you bought it, is it placed in service?

[00:04:41] And they go, yeah, yeah, yeah, it's all good to go.

[00:04:42] I'm like, okay, that's the problem.

[00:04:44] We can't start, we're way too far down the road.

[00:04:47] We have to basically start before you've even considered buying the product or like basically at the buying stage or the looking stage or developing stage.

[00:04:54] That's what we have to consider at that point in time before we can even start getting into it.

[00:04:59] So I'm an airline pilot.

[00:05:01] I'm just looking for passive investments and I'm not going to go out and buy my own land and develop my own property.

[00:05:08] I don't know what you're talking about.

[00:05:10] And so make it, make this simpler for me.

[00:05:12] Like what, why is, why should this be in my investment strategy?

[00:05:18] And, and how do I get into this type of investing?

[00:05:21] If I am never going to go out, I'm never, I'm not going to go buy.

[00:05:25] First of all, I'm not going to go find OZ opportunity zones.

[00:05:29] And then I'm not going to be the type of investor that buys that property and has to double the basis in it.

[00:05:35] Right?

[00:05:36] Like I'm not, I'm listening to the show and I'm like, I don't, I'm trying to wrap my arms around what this is and how can I, I can take advantage of it, but I'm not going to be active in it at all.

[00:05:43] What, walk me through a step-by-step process there for that person.

[00:05:47] Yeah.

[00:05:47] Yeah.

[00:05:48] So if you totally want to be completely hands-off, completely passive, right?

[00:05:50] You're an airline pilot.

[00:05:51] Like, so for you then, if this is, that's the case, maybe you've got a really big capital gain sale this year, right?

[00:05:57] Maybe you sold a bunch of property and now you like, you're like trying to like, you're like, man, I can't like too late to do a 1031.

[00:06:04] Or you don't want to do a 1031 or maybe it's capital gains.

[00:06:08] Maybe it's something like that.

[00:06:09] Just basically you have some kind of capital gain.

[00:06:11] If that's the case, you can utilize qualified opportunity zones because you can invest into what's called a qualified opportunity fund.

[00:06:20] And so what that does, you have 180 days post-sale.

[00:06:23] Now there's differences if you invest into it.

[00:06:25] Like let's say you're another syndication, you've got capital gains.

[00:06:28] There's different rules actually that we can play with there and we can get into that.

[00:06:31] But you can invest those and defer that gain until 2026, basically.

[00:06:38] So it's not an elimination.

[00:06:39] It's not a complete deferral.

[00:06:41] It's a temporary deferral.

[00:06:42] And you'll probably, if you start researching QO apps as well, you'll see there's like, oh, maybe I'll get this five-year or seven-year step-up piece too.

[00:06:50] Unfortunately, we're too far down the road at this point to actually get to utilize that.

[00:06:54] But you still will get at least two years of deferral.

[00:06:58] And it's actually more than that because since it's recognized in 2026, you don't pay the tax until 2027.

[00:07:04] So April 15th is when the tax would be due.

[00:07:08] Extend longer than that, right?

[00:07:09] So taxes still do, but you don't file the return.

[00:07:11] So you don't have to make tax payment until 2027, basically.

[00:07:15] So you've got some time, right?

[00:07:17] Yeah.

[00:07:17] So let's make this really practical.

[00:07:19] So we're filming this on November 8th.

[00:07:23] Trump gets elected, and all of a sudden the stock market just went crazy.

[00:07:27] So you're saying that the stock market's up like, I don't know what it's up, but it's up by probably double-digit percentages due to speculation on what's going to happen.

[00:07:35] Fed just lowered the rates.

[00:07:36] I have this big gain in the stock market.

[00:07:39] So you're telling me that if I sell that stock and find something within 180 days of selling that stock that's in a qualified opportunity zone, that I can defer the gain from the stock by investing in that fund, right?

[00:07:54] Is that what you're saying?

[00:07:54] Bingo.

[00:07:55] Cryptocurrency, stock, anything that produces capital gain or 1231 gain would be another term that your CPA might use.

[00:08:03] It's like if you have something of that nature, you can utilize qualified opportunity zones.

[00:08:09] Gotcha.

[00:08:09] So it's stock, sell a business, and real estate, I think, are the three things, yeah?

[00:08:13] Bingo.

[00:08:14] Yep.

[00:08:14] Awesome.

[00:08:14] And so you said this is phasing out, and you kind of made me a little confused.

[00:08:19] So I thought that QOZs would be applicable for 10 years or something like that.

[00:08:26] If I held it for 10 years, then it goes away.

[00:08:27] So what do you mean it's phasing out?

[00:08:30] So what the phase-out piece is like you might do some research and see that like back in 2017, if you invested, like there was an, if you've invested right from the get-go, you would have gotten a five-year increase in your step-up.

[00:08:42] And so basically there's some aspects to QOZs that have gone away right now.

[00:08:47] Now, granted, we're talking post an election, and QOZs, there is a bill in the Ways and Means Committee right now, actually, that might provide some more beneficial stuff to that and bring some of that stuff back.

[00:08:59] So it's not phasing out, but the last date you can do a qualifying QOZ investment is the end of 2025.

[00:09:06] Understood.

[00:09:07] So I could invest still prior to 2025 and then take the full advantage of this QOZ based on the holding it for 10 years, right?

[00:09:18] Correct.

[00:09:19] Yeah.

[00:09:19] So if you invest December 31st, 2025, you'll still be able to utilize that 10-year hold, right?

[00:09:24] You still will get to take that benefit and that advantage.

[00:09:27] How do I find a QOZ fund?

[00:09:29] Great question.

[00:09:30] So there's a lot of syndicators out there that you can talk with.

[00:09:35] We know a few if you're interested in that and have a discussion with those.

[00:09:39] But there are people out there who this is their specialty, and they primarily work and operate and do developments within qualified opportunity zones.

[00:09:48] Gotcha.

[00:09:49] So to back up, this was something that was part of the Tax Cuts and Jobs Act of 2017, and the idea behind it was to take areas that needed fresh investment.

[00:09:59] So they went to the local politicians and they said, hey, we want you to draw boundaries around areas that could use fresh investment, right?

[00:10:08] And we're going to give tax incentives to those places.

[00:10:10] That was an imperfect practice.

[00:10:12] I think in hindsight, people kind of realized that some places ended up being OZs that maybe shouldn't have been OZs.

[00:10:18] Can you speak to that a little bit and just where we are now in terms of those boundaries and what makes an OZ an OZ?

[00:10:26] Yeah.

[00:10:28] So the government basically told the states across the board, said, hey, you tell us what you think your OZs should be, right?

[00:10:35] They basically looked like the intention was supposed to be distressed areas or lower income areas.

[00:10:41] And basically, the whole purpose of QOZs was to provide investment to these communities, to bring new investment, new properties, new renovations, right?

[00:10:51] Like the doubling basis test, like we'll talk about them sure later.

[00:10:55] But there are some places where it totally is a great advantage.

[00:10:59] Like it actually has helped.

[00:11:01] I've seen some operators in Dallas who actually did rebuild areas and it's been fantastic.

[00:11:06] Then there has been some areas where it was a little bit more affluent and maybe they got some benefits they might not have.

[00:11:13] They should not have gotten actually.

[00:11:15] But that was the overall intention of this.

[00:11:17] It was to bring new money into these types of communities.

[00:11:19] Makes sense.

[00:11:21] So that's the foundation of where these things came from.

[00:11:24] Very good.

[00:11:25] So what's the difference between an opportunity zone, the boundary, and then an opportunity zone, the fund, the QOZ fund?

[00:11:35] The fund is the project that's being conducted within that boundary, right?

[00:11:42] Correct.

[00:11:43] Yep.

[00:11:43] So the fund would be a partnership and the partnership can be, it can be a husband and wife.

[00:11:49] It can be a spouse and spouse.

[00:11:50] It can be two best buddies, right?

[00:11:53] That's all it has to be.

[00:11:54] It has to be some kind of entity that has more than one partner, right?

[00:11:58] So it can be a corporation, it can be a C-Corp, S-Corp, partnership, whatever.

[00:12:02] It just has to be one of those types of entities.

[00:12:05] And then you then look into purchasing a qualified opportunity zone property or business is what the requirement is after that.

[00:12:14] Understood.

[00:12:15] So John Smith that decides that they want to buy a house in OZ within the boundaries doesn't qualify, but John Smith and a friend can create a partnership and buy that house in an OZ and take advantage of these tax benefits.

[00:12:29] As long as they both have capital gains, absolutely.

[00:12:32] So we talked about this before the show.

[00:12:34] So this is a really important part.

[00:12:37] You have to do things in a certain order, right?

[00:12:40] Because you have to have capital gains to invest.

[00:12:44] So talk us through that.

[00:12:45] Yeah.

[00:12:46] So the first part, you got to have some kind of capital event, right?

[00:12:48] Right now you're like, cool, crypto is higher than ever.

[00:12:52] My NVIDIA stock is just blown through the roof.

[00:12:54] And you're like, I kind of want to diversify.

[00:12:57] And you've got your buddy who's in exactly, right?

[00:13:00] And so you want to just like diversify your portfolio.

[00:13:02] And it's like, you see the property that like you've been eyeballing.

[00:13:05] So, and your buddy wants to do the same thing.

[00:13:07] So you both take your capital gains amounts.

[00:13:10] They'll just say $100,000 just for easy math purposes.

[00:13:14] So you both have $100,000 capital gain.

[00:13:16] You then, and you then both create a partnership together.

[00:13:19] And you state within the operating agreement that this is going to be a qualified opportunity fund.

[00:13:24] You put the capital gains into the LLC.

[00:13:27] And now you've now effectively deferred that.

[00:13:29] And now you can purchase the property with those funds.

[00:13:34] Does this work for short-term and long-term capital gains?

[00:13:37] Yeah.

[00:13:38] So you can defer both short-term and long-term capital gains.

[00:13:42] The only thing you can't defer is depreciation recapture, right?

[00:13:46] That's what makes this different from a 1031 is that if you've got, and granted, if most people,

[00:13:51] if you haven't done cost segregation on a property, you're not going to have to worry about depreciation

[00:13:54] recapture act.

[00:13:55] So because $1,250 unrecaptured gain, which is straight-line depreciation, that is deferrable, right?

[00:14:02] So that can be deferred.

[00:14:04] Only if you've done a cost on a property, and maybe if you've got some other things in there,

[00:14:08] those are the only things that cannot be deferred.

[00:14:11] Everything else, 1231 gain, collectible gain.

[00:14:14] So that's very niche.

[00:14:16] So it's not like very few people are going to have that happen.

[00:14:18] But anyone who has anything like that, that is basically capital gain or capital gain preferential

[00:14:23] treatment, those can be deferred with QOZs.

[00:14:26] So this is an amazing tactic for somebody who just hit the jackpot on some stock.

[00:14:31] It goes up like crazy in a month, and they're like, I want to get out before this thing crashes.

[00:14:37] It's GameStop.

[00:14:39] Then they're like, I'm taking all my money off the table.

[00:14:41] But now any stock you're holding for less than a year, you're going to be exposed to

[00:14:45] short-term capital gains tax, which is your ordinary income tax rate, right?

[00:14:49] So that'd be a great way to figure out how to offset that.

[00:14:55] So that's fantastic.

[00:14:56] Totally.

[00:14:57] Yeah.

[00:14:57] So I bought an RV park in West Texas, probably, I don't know, call it 2019.

[00:15:03] And when I noticed, or it was 2020, actually, I noticed it was in an OZ.

[00:15:06] But I didn't take any action on putting it into an opportunity zone fund for my investors.

[00:15:12] But I'd like to talk about a case study if I would have, right?

[00:15:15] So first of all, I think what disqualified me from even attempting to make it an OZ fund

[00:15:21] for investors would have been the fact that we weren't planning on doubling the basis in

[00:15:26] the property.

[00:15:26] So we bought this 120 site campground, effectively.

[00:15:31] And we had no intentions of putting in more or equal to what we bought the property for.

[00:15:37] Is that, is that, that would disqualify me right away, right?

[00:15:40] Correct.

[00:15:41] Okay.

[00:15:41] So if you're just buying a house in an OZ with your buddy and you're using capital gains

[00:15:47] to buy it, to defer it, like you, you're going to have to do some capital improvements

[00:15:51] to that site.

[00:15:52] And the whole intention of this tax code, from my understanding, is that it's to identify

[00:15:57] areas within this, in this, in your governance that need development.

[00:16:02] So like you're going to be injecting serious capital into this property potentially.

[00:16:07] But let's just say for, for, for the matter of this conversation that I was going to buy

[00:16:12] that RV park and I was going to completely upgrade it and double my basis.

[00:16:16] So let's say I bought it for a million dollars.

[00:16:18] I was going to put a million dollars of improvements into the park.

[00:16:22] And that would have made it, that would have checked the first box on the checklist for the

[00:16:26] opportunity zone.

[00:16:26] So if I were doing it as an operator and a syndicator, what would be the next thing that

[00:16:31] I would have to do in order to make sure that it's, uh, you know, on record with the IRS

[00:16:35] as being an OZ?

[00:16:37] Yeah.

[00:16:37] So this is where the paperwork could, it comes involved, right?

[00:16:40] It's like now what we have to do is we have to file very specific forms to do this.

[00:16:45] Um, it's really interesting actually.

[00:16:47] So a quick little tax nerd piece.

[00:16:50] There is something called private letter rulings that the IRS issues.

[00:16:53] People basically go to the IRS because they've screwed up in some way and they go, please let

[00:16:58] me do whatever I need to do.

[00:17:00] As an accident, I forgot to do the paperwork to, oh, is what it always winds up being.

[00:17:04] You see that happened a lot with S corporations.

[00:17:06] The second thing that I see happen a lot is qualified opportunity funds because people forget

[00:17:12] to file these two specific forms, an 8996 and an 8997.

[00:17:17] The 8996 goes on the 1065 partnership or whatever entity you're working with, right?

[00:17:24] Whatever entity you're doing the investment with.

[00:17:26] It's basically you tell the IRS, hey, I am doing my qualified opportunity fund.

[00:17:31] Here are the gains I'm deferring.

[00:17:32] Then the 8997 winds up on your individual return.

[00:17:36] And that's also the other place you're reporting this, right?

[00:17:39] Oh, it's also a form 8949 where you're telling everybody, hey, this is like, it shows up.

[00:17:44] The gain first shows up there.

[00:17:46] Then it shows up on the 8997 saying, hey, I'm deferring this.

[00:17:49] And you have to keep filing that the next couple of years to show that's where you've deferred,

[00:17:54] right?

[00:17:54] They continue reporting the IRS.

[00:17:55] This is the gain I've deferred.

[00:17:57] Just letting you know that I've got this investment.

[00:17:59] So when 2026 rolls around and you have to recognize that gain and file your return,

[00:18:04] now you have to pay the tax on that.

[00:18:06] That's the way they want you to keep track of that.

[00:18:08] And so let me tell you, tons of people forget that constantly.

[00:18:12] That's why literally it's a weekly thing I see the IRS releases and says, hey, by the way,

[00:18:16] someone didn't do this.

[00:18:17] And so you can go do that.

[00:18:19] PLRs can cost between $3,000 or $30,000 depending on what it is.

[00:18:23] So that's like not a cheap thing to miss.

[00:18:26] Yeah, it makes sense.

[00:18:27] Now, OK, so I fill out my forms.

[00:18:29] I get this all done.

[00:18:30] But as an operator, I didn't have to have any personal capital gain, right?

[00:18:34] I just have to make sure that all the money that I accept is from gains from other people.

[00:18:39] Or can I just accept regular cash?

[00:18:42] I mean, what's the quality?

[00:18:43] What's the, you know, can I mix this in with other money?

[00:18:46] Or does it all have to be capital gain money that's being invested in this project?

[00:18:50] Great question.

[00:18:51] So you can have other money.

[00:18:52] You can have other cash, right?

[00:18:53] Someone just says it sees a deal that they want to be a part of and they don't have capital gains.

[00:18:57] They can be in it.

[00:18:58] They just won't get the step up piece.

[00:19:02] They won't get that tent, the juice, like the juicy part at the end, the 10 year step up at the end.

[00:19:06] Can totally do it.

[00:19:07] We can have mixed use funds.

[00:19:09] It's just you're you wind up getting limited there.

[00:19:12] Gotcha.

[00:19:13] So if you're looking for an OZ fund as a cash investor that has no gain or gain, you might be able to invest in this.

[00:19:20] And but you're not going to get the benefit unless you're doing this specific game.

[00:19:23] And I wanted to ask, OK, so I'm that passive investor investing in this OZ that I found.

[00:19:29] What do I have to do on my tax return or with my CPA specifically to declare that, hey, I'm taking my gain from this stock sale and I'm investing it in that OZ fund.

[00:19:43] And this is how much should be deferred.

[00:19:45] How do I document that?

[00:19:47] Yeah, well, that's going to be through the 8996 and 8997, right?

[00:19:51] That's going to be like doing that on your tax return.

[00:19:53] That's the way how it's going to be done from that side of making sure those forms get filed.

[00:19:58] So those forms are investor specific, not deal specific.

[00:20:02] Correct.

[00:20:03] Got it.

[00:20:03] Gotcha.

[00:20:04] So as the operator, I may not have to do anything special.

[00:20:06] I just have to just make sure that I qualify through doing this and approving of doing the capital gains.

[00:20:12] How long do I have to make those improvements to the property?

[00:20:16] So, yeah.

[00:20:16] So you have a so whenever say let's say you get you purchase raw land as an operator or you purchase like a an older dilapidated building or maybe you're doing like so maybe you're doing new construction or reconstruction.

[00:20:28] Right.

[00:20:29] You have a 30 month period to do that.

[00:20:32] So basically you've got what is that?

[00:20:34] That's two and a half years.

[00:20:36] Right now.

[00:20:36] Like something.

[00:20:37] Yeah.

[00:20:37] Two and a half years.

[00:20:38] Two and a half years to make all the improvements.

[00:20:41] Now, what's interesting is that the IRS says it's when you start.

[00:20:45] Right.

[00:20:45] So you can purchase a property and you do not have to start day one.

[00:20:49] Right.

[00:20:50] That is so it's really interesting about that.

[00:20:52] Now, granted, they're they're probably like there's no rules behind this in the regulations, actually.

[00:20:56] But the IRS would probably invoke some kind of anti-abuse rule if you just let the property sit there for five years and didn't touch it.

[00:21:02] Right.

[00:21:02] Because it's going against the purpose of this.

[00:21:04] So you do have time as you're like trying to build capital.

[00:21:07] Maybe you've got some financing.

[00:21:08] I mean, we have clients all the time that run into government issues where they're like where they're just like, hey, I want to get started.

[00:21:14] I want to get going.

[00:21:15] And the government's like, yep, well, you guys know it's like all real estate investors and you're dealing with permits and those types of things.

[00:21:21] Government gets in your way a lot of times and they slow things down.

[00:21:24] You your plans get pushed back.

[00:21:26] So you can do SB within a 30 month period that you do those improvements, but it doesn't have to be day one of the investment.

[00:21:34] I got to ask.

[00:21:35] So you're telling me that these OZs are in areas that have been deemed as low income, maybe or areas that need capital injection.

[00:21:47] So in essence, areas that are not as good.

[00:21:50] And there might be some exceptions where OZs are in areas that were not as deserving as others.

[00:21:56] But then I have to buy the property and I have to double my basis in the investment and build something or improve it.

[00:22:03] And there's all these stipulations and all these IRS tax codes.

[00:22:06] This has been what's going on for the last, I guess we'd started in what, 2018 or 2017?

[00:22:11] 18, yeah.

[00:22:12] Can you speak high level?

[00:22:13] Like how have these gone?

[00:22:14] Because basically what you described to me is a great tax deferral strategy into one of the most riskiest elements of real estate.

[00:22:22] Right.

[00:22:22] Because you basically said lower quality area and you're going to be in a construction development job site.

[00:22:29] Like those are those are two areas of general risk.

[00:22:31] I mean, how are these have gone for investors over the last five years or so?

[00:22:35] No, that's a great question.

[00:22:36] Honestly, it's gone well, in my opinion.

[00:22:38] I've seen it going pretty well because like you and like if you're doing small deals,

[00:22:44] that's where it gets a little bit more difficult.

[00:22:45] But when you're doing larger ones, you're doing larger like multifamily, things of that nature,

[00:22:51] more like sometimes more commercial areas.

[00:22:53] It doesn't wind up going well because you're bringing these improvements to the communities.

[00:22:57] And it actually winds up like people are people get good returns out of it, right?

[00:23:02] Because you get depreciation.

[00:23:03] You get bonus appreciation.

[00:23:05] You get all that stuff.

[00:23:06] And then additional like so far from what I'm saying is not had that many people issue.

[00:23:10] Like I said, most people have the issues is when they're trying to set everything up on the front end versus when you're like operating the property later on.

[00:23:17] What about the ones that didn't go well?

[00:23:19] Talk about those.

[00:23:21] The ones that didn't go well, I have had some clients where they bought, it was like a single family property in an area.

[00:23:29] And they did a lot, they did a ton of work.

[00:23:31] They did it really well.

[00:23:32] They improved it.

[00:23:32] They got it ready.

[00:23:33] And then they just wound up like having issues with, you know, like they've tried doing a short term, like one example specifically, short term rental.

[00:23:39] And so they had someone staying there and there was someone that parked right in front of the street, right?

[00:23:44] That parked right in front of the driveway and they couldn't get them out.

[00:23:46] And then there are other issues with people in the area.

[00:23:49] So there is difficulty sometimes where like you run into, like that's why I highly recommend, Brian, I imagine you probably say, do a ton of research into your area and make sure that it's going to work.

[00:24:00] Don't just think I'm going to get sweet tax benefits here.

[00:24:02] So I'm going to do it without thinking about it, right?

[00:24:05] Like I imagine that's where you're going is that like, let's think about this first and research our area.

[00:24:09] Make sure we're not going to have issues for whatever purpose we want to do.

[00:24:13] Like whether it's a long-term rental, single family, whether it's short-term rental, seven days or less type of stay, midterm, whatever you're thinking about.

[00:24:21] Do lots of research into the area before you even think about making the purchase.

[00:24:26] All right.

[00:24:27] So I'm still wrapping my head around the structure and how these things work.

[00:24:31] So let's back it up to that $100,000 house.

[00:24:35] I want to buy this $100,000 house.

[00:24:37] It happens to be in an OZ and I have a choice.

[00:24:40] I can just buy it cash or have to use capital gains.

[00:24:43] But because it resides within an OZ, I could say, hey, I'm going to sell some NVIDIA stock.

[00:24:49] I'm going to get smoked because I've got tons of gains on this thing, right?

[00:24:54] So I'm paying capital gains tax on all of those proceeds unless I take that and invest it somewhere like this.

[00:25:01] So now let me ask a quick question that's just on my mind.

[00:25:06] Let's say I am a real estate professional and I invest that in a mobile home park deal that has really high depreciation.

[00:25:18] That can offset the sale from NVIDIA stock as well, right?

[00:25:23] It could.

[00:25:23] Absolutely.

[00:25:24] Definitely.

[00:25:24] It could.

[00:25:25] Okay.

[00:25:25] So this isn't the only way to offset capital gains.

[00:25:29] It's just one way.

[00:25:30] Okay, great.

[00:25:31] Yep.

[00:25:31] Yeah.

[00:25:32] No, I would think about this.

[00:25:33] It's one of the tools in your Batman tool belt, right?

[00:25:36] That's like the thing about in your utility belt.

[00:25:38] Just like think about it as like you've got lots of options.

[00:25:40] You've got 1031s, QOZs, lazy 1031s.

[00:25:43] There's so many options you can do.

[00:25:45] This is just one of them that does have a sweet benefit after 10 years.

[00:25:49] So it's like, I guess a way to think about it is like if you have something that you think will work long term, then go for it because you're going to get great benefits out of that.

[00:25:59] But if you're not sure, don't commit.

[00:26:01] Perfect.

[00:26:02] Okay.

[00:26:02] So explain to me the doubling in basis and the 10 years hold period and how that relates to it as it relates to the house, the $100,000 house example.

[00:26:13] Yeah.

[00:26:13] So let's say you and your buddy, you get this $100,000 house together.

[00:26:17] You purchase it today, 11 November 2024.

[00:26:23] So now what happens is that you have to basically put another $100,000 into the property in some form or fashion that improves the house substantially.

[00:26:34] You have two and a half years to do this.

[00:26:37] Like we're talking about, so once you start the improvements, you've got two and a half years to get that taken care of and get that done.

[00:26:42] And I think that's important to point out that it's doubling the basis.

[00:26:45] It's not doubling the value.

[00:26:47] So if you put $5,000 into it and it appraises for $200,000, that doesn't count, right?

[00:26:53] Bingo.

[00:26:54] Yeah, you're correct.

[00:26:55] Actually, I want to mention too is that you do have two options.

[00:26:59] You can have original use or substantial improvement.

[00:27:03] Substantial improvement is a doubling basis.

[00:27:05] Original use is basically new construction.

[00:27:08] So if you build something brand new there that's never been lived in or used before, and that means not just new to you, new to anyone.

[00:27:17] No one can have lived in this property before.

[00:27:19] So if you do deconstruct and reconstruct in this area, that would work too.

[00:27:24] And you wouldn't have to do the doubling basis.

[00:27:26] But very often, it's hard to find that piece.

[00:27:30] That's a little bit more difficult.

[00:27:31] Understood.

[00:27:32] Okay.

[00:27:33] And then the 10-year hold, how does that work?

[00:27:35] 10-year hold.

[00:27:36] So once you've done your investment, and so like you said, let's say you do it today, November 2024.

[00:27:41] You make your investment.

[00:27:43] So 10 years from now, you will then, and on 2034, once you get to that 10 years, now you get the step, whatever the fair market value is.

[00:27:54] So let's say it's $100,000 property today.

[00:27:56] Let's say it's worth a million dollars 10 years from now.

[00:27:59] It's a great return.

[00:28:00] Hopefully we all can find that deal.

[00:28:01] But let's say that's the case.

[00:28:02] That $900,000 of appreciation.

[00:28:05] Well, minus the extra $100,000 that you had to put into it, right?

[00:28:09] Correct.

[00:28:09] Correct.

[00:28:09] Okay.

[00:28:10] So you're $200,000 into it, but it's worth a million.

[00:28:13] But so the $800,000 gain would be tax-free.

[00:28:16] Correct.

[00:28:17] Now, also what's really sweet about this is depreciation recapture.

[00:28:22] Normally we have to think about that whenever we sell properties.

[00:28:25] Yeah.

[00:28:25] That is included in the step up.

[00:28:27] So you get to take all these depreciation deductions without ever having to pay ordinary income tax on them.

[00:28:33] Unreal.

[00:28:33] I do want to stress that as being an important thing because last year, I believe, we sold a property and did a 1031 exchange with our investors into another investment.

[00:28:45] And those 1231 depreciation, I think it's 1231, right?

[00:28:50] The short-term life, you pay taxes on that.

[00:28:55] You get recaptured on depreciation.

[00:28:59] So just be mindful.

[00:29:01] I know we're kind of deviating subjects here a little bit, but I think it's an important nuance and an important distinction.

[00:29:06] Like if you're selling real property and you've taken depreciations five years ago, you have a section on your tax, you know, in the tax code 1231, that's going to end up on your K1.

[00:29:17] Those 1231 recapture, like you're going to pay a flat 20% taxes on that recapture if you 1031 exchange into something else.

[00:29:26] But if you OZ, if you go into an OZ, you're not capturing that.

[00:29:31] And that can be massive, a massive difference.

[00:29:34] And I want to stress this because I literally just had a conversation with our CFO and an investor who did a 1031 exchange into our deal.

[00:29:42] And she was like talking and asking questions about this 1231 stuff.

[00:29:46] And it was kind of enlightening for everybody to say, hey, you pay recapture tax on the depreciation you take early on in investing.

[00:29:54] So it's important.

[00:29:55] I think it's an important distinction that OZs don't do that versus 1031s.

[00:29:59] Absolutely.

[00:30:00] Yeah.

[00:30:00] So that's like part of the sweetness of the deal in this instance.

[00:30:04] So there's 1245, 1250, and 1231 gains.

[00:30:07] 1245 and 1250, that's where you get your depreciation recapture.

[00:30:11] That's where that becomes ordinary income, right?

[00:30:13] So let's say you do a cost irrigation study on this and you get those benefits, get accelerated bonus, maybe even 129 depreciation.

[00:30:22] You get 139 deductions on this.

[00:30:23] Take all that sweet benefit, right?

[00:30:25] Get a big ordinary deduction today.

[00:30:27] The IRS says, great, no problem, right?

[00:30:29] The tax code says, hey, that's totally cool.

[00:30:30] You can do that.

[00:30:31] But when you sell this property because you took an ordinary deduction today, you now have to take an ordinary deduction tomorrow.

[00:30:37] And so that means that you're now taxed.

[00:30:40] So you take straight line depreciation, just normal residential 27 and a half or 39 year, which is very long.

[00:30:48] You pay 25% what's called preferential, even though no one prefers that, gains, 25% gains.

[00:30:55] And then anything that is actually 5, 15 year, like property, and you can see this on your depreciation schedules, is that's now taxed at ordinary income.

[00:31:06] So if you have a major capital event in one year, you could wind up paying 37% rates on that piece.

[00:31:14] Right.

[00:31:14] Okay.

[00:31:14] So I want to jump in here because I know that we've got listeners whose heads are spinning here.

[00:31:19] So let me just catch everybody up to speed and fill in some blanks.

[00:31:23] So what we're saying is on a real estate deal, the IRS allows you to write off the depreciation of an asset.

[00:31:31] And we talk about this a lot.

[00:31:33] I've talked about it in my ebook.

[00:31:35] Why would the IRS allow you to write off a value, write off an asset that is, quote, decreasing in value when real estate actually increases in value?

[00:31:47] It's like, well, because sticks and bricks actually do deteriorate over time and because it's an incentive.

[00:31:54] But if you write off a printer, you throw it in the trash at the end.

[00:31:58] Right.

[00:31:59] But when you write off real estate, you're selling it later for more than you bought it for.

[00:32:04] And the IRS goes, well, even if you sell it for the same as you bought it for, they say, hey, you bought it for a million bucks.

[00:32:09] You wrote it down to 500,000.

[00:32:12] You got to pay us back.

[00:32:13] Like you didn't actually lose that money.

[00:32:15] We just let you take the tax benefit.

[00:32:17] We let you borrow the tax benefit by letting you write this down on paper.

[00:32:22] So hopefully that makes sense to the audience.

[00:32:23] What we're talking about here is that normally anytime you sell an asset, you got to give back that tax benefit that you borrowed while you owned it, while you were taking those depreciation benefits.

[00:32:34] But if you invest those proceeds into an OZ, the recapture disappears, which is unbelievable.

[00:33:09] Okay.

[00:33:12] So if you set up the fund with your own capital gains to then construct or something of that or have others invest into it, if they're not bringing it again, again, I know I've said this.

[00:33:28] If they're not bringing capital gains, there's just not going to be a whole lot of benefit for them there.

[00:33:32] But if you are doing construction, right?

[00:33:35] If you're constructing this area and maybe you're building townhones, maybe you're doing multifamily units, doing like a build to rent structure, I think you said.

[00:33:42] Is there any downside of running it as a QOZ if lots of investors aren't going to come in with capital gains?

[00:33:51] To my knowledge, there's no downside.

[00:33:53] It just means that you're going to have...

[00:33:56] It's just normal syndication investment in this instance, right?

[00:34:01] I could see Ryan just searching the map on all the plots of land that he wants to see which ones are in QOZs now.

[00:34:08] No, yeah, no.

[00:34:09] I mean, we do.

[00:34:10] And it's funny.

[00:34:11] People always ask me like, oh, do you guys do OZ funding?

[00:34:13] And I don't know.

[00:34:14] We kind of the deal comes first for us.

[00:34:16] I mean, I do think the OZ is important, but I don't want to try to jam the square peg into the round hole.

[00:34:21] We find what makes sense and we find that...

[00:34:25] But this is, I think, important.

[00:34:28] Tay, you bring this up and I might go on a little bit of a tangent, but I think it's important.

[00:34:32] There's people who will go out and specifically look for opportunity zone properties and are very attuned to what makes sense and how to do it and what works and how to structure it.

[00:34:46] And, you know, that's just not something we specialize in, right?

[00:34:49] Like, that's not our niche.

[00:34:51] So when we bought that property, we were like, you know, everybody was excited about OZs.

[00:34:55] So when we found that RV park in an OZ, we were like, well, how does this work?

[00:34:59] And then again, we ran into the doubling the basis.

[00:35:02] Like, there was just no way we were ever going to spend a million dollars on that capital improvement, which would have qualified it.

[00:35:09] But we weren't going to force the issue because the deal just made sense as it is.

[00:35:15] So we wouldn't want to look for ways to spend a million dollars if we didn't really need to, if that makes sense.

[00:35:19] So, I mean, these are deals you just have to...

[00:35:22] Right.

[00:35:22] And we didn't buy the 1,300 acres because it was an OZ.

[00:35:26] It just happened to be an OZ.

[00:35:27] And now we're saying, hey, there's obviously a way to take advantage of this.

[00:35:31] So that's great to know that there isn't really any downside of having a QOZ component to a regular deal.

[00:35:39] Yeah.

[00:35:40] No.

[00:35:40] Yeah.

[00:35:40] There's no downside.

[00:35:41] Just like a normal syndicate, just normal deal that like potentially if someone else sets up...

[00:35:46] What's interesting is someone could set up their own QOF and then do it themselves, right?

[00:35:51] They could like...

[00:35:52] Like there's something like you can then purchase the property that has been newly built, is new construction.

[00:35:57] And you actually can avoid the doubling basis test in that instance.

[00:36:02] Right.

[00:36:02] Right.

[00:36:03] Because you're building something new.

[00:36:04] Here's a question for you.

[00:36:05] You got to hold it for 10 years in order to get the step up in basis.

[00:36:08] So does that mean the entire syndication has to be a 10-year hold?

[00:36:12] Yeah.

[00:36:13] So like if that's the case, then correct.

[00:36:15] Like everyone...

[00:36:16] So you can't just build it and then get out.

[00:36:18] What about the cash investors?

[00:36:19] Could they invest in a separate...

[00:36:22] Could you do two concurrent deals and you decide whether you want to go into the QOF?

[00:36:27] Or the regular side?

[00:36:29] Yeah.

[00:36:30] I guess you have to plan out like who's going to be mixed use in that piece because they're

[00:36:34] never going to get take advantage of that 10-year hold on the asset.

[00:36:37] Anyway, so I guess you could structure that in two different ways if you wanted to.

[00:36:41] This opens up a can of worms because, you know, how do I know that the operator is not going

[00:36:45] to sell it within 10 years, right?

[00:36:47] So maybe my due diligence would be understanding like buy-sell decisions and what the operator is

[00:36:54] obligated to.

[00:36:54] Because, you know, they could just say, oh, we got a sweet offer a year into it and sell

[00:36:59] it.

[00:36:59] And then you're paying the gain that you thought you weren't going to get.

[00:37:03] What have you seen, Nathan, in like operating agreements?

[00:37:05] If I'm doing my due diligence on a syndication that's a OZ fund, what are you seeing for voting

[00:37:13] rights, buy-sell decisions, et cetera?

[00:37:16] Most of the deals that I've seen that have not, that like are larger deals, it's like you are

[00:37:21] finding a QOZ operator.

[00:37:23] Like this is their intention.

[00:37:25] The intention is for the 10-year hold.

[00:37:27] If someone's like, oh, hey, I've got this, but we could sell earlier, I wouldn't want to

[00:37:30] do that deal because there's too much risk, right?

[00:37:32] If I, so long as I like, again, it's like taking it up.

[00:37:34] We always want to take in all the economics overall.

[00:37:36] I'm like, hey, if it's a sweet deal, let's do it regardless.

[00:37:39] But if you're going in for the intention of the QOZ, you want to make sure that's locked

[00:37:44] in, that they are going to honor that and that there's, that they basically, they can't

[00:37:49] get you out of it, right?

[00:37:50] Like that's what I would recommend on that, on that front is like, if you want to do the

[00:37:54] QOZ, you make sure it's an operator that is bound and determined with the operating

[00:37:58] agreement and bound, like bound by it and the voting and like all the other documents

[00:38:02] that it's going to happen.

[00:38:04] And what, so if I'm looking at the QOZ deal and I decide, okay, hey, I want to, I want

[00:38:12] to invest in this.

[00:38:14] I have gains in 2024.

[00:38:16] I'm going to invest in this in the next 180 days.

[00:38:19] How do I report that as an individual investor?

[00:38:22] Do I, I get those save, I get those tax breaks that, that form you mentioned earlier.

[00:38:26] I get them like right away.

[00:38:28] I don't have to wait.

[00:38:29] I just have to assume that that operator is going to get the deal done to, to,

[00:38:33] capital improvements within two and a half years, right?

[00:38:35] I can take the advantage of the shielding the gains right away.

[00:38:38] Yeah.

[00:38:39] So if you're talking about like you invest, you file your eight, your form 8996 and then

[00:38:43] yes, like you don't have to like the 8997 is not your responsibility unless you set up

[00:38:48] your own QOF, right?

[00:38:50] And that's what's, that is something interesting.

[00:38:51] I think we've touched on yet is that you can create a cute, your own QOF that invests

[00:38:54] in other QOF.

[00:38:56] Because what's considered qualifying property is qualifying opportunities on partnership

[00:39:01] interest or stock.

[00:39:02] So you can create your own QOF.

[00:39:05] That's actually what happened as has happened for other deals when they run.

[00:39:08] Cause like one of the key parts of a QOF is that you have to have 90%.

[00:39:12] Basically you have to have 90% in qualifying property, which would be in this instance would

[00:39:18] be QOZ business property, QOZ partnership interest or stock.

[00:39:23] So you can, so that way.

[00:39:24] So basically if you're running into those thresholds, basically you can only have like

[00:39:27] 10% of cash in the deal.

[00:39:28] It's got to be deployed and it's got to be working.

[00:39:30] Who would set up their own QOZ fund?

[00:39:34] High net worth operators.

[00:39:36] I mean, who, who, who would do you see that actually pulls the trigger on something like

[00:39:40] that?

[00:39:40] Real estate professionals just in general, who are, who are actual real estate professionals

[00:39:45] are doing that.

[00:39:47] Like, so like basically cause like they could take these depreciation benefits and never

[00:39:50] have to realize the depreciation recapture related on the road.

[00:39:54] So those, those folks are doing it.

[00:39:56] People who know the markets well, and then operators of QOZ funds are doing it too.

[00:40:01] Right.

[00:40:01] Because they know they're going to have the funds.

[00:40:03] And so they, they set up their own, take their own capital gains and then push it into

[00:40:07] the, their own deal in this instance.

[00:40:09] And this is why you want to be working with a tax strategist.

[00:40:14] Little plug for a whole CPA here.

[00:40:17] So this is, this is the kind of one-on-one stuff that Nathan and I do every quarter.

[00:40:21] Um, this is fantastic.

[00:40:24] Yeah.

[00:40:25] A hundred percent.

[00:40:25] We're, if you guys ever, if anyone's ever has interest, Hall CPA is always taking clients

[00:40:29] where we are quick plug real estate CPA.

[00:40:32] Um, our, our founder and CEO, Brandon Hall has been on the podcast already.

[00:40:38] And we are like, if you cannot tell by our tag name, we're the real estate CPA.

[00:40:42] This is our niche.

[00:40:43] This is our specialty.

[00:40:44] We do other stuff as well, right?

[00:40:46] Like we work with other businesses, but all of our clients are somehow got something,

[00:40:50] got their hands in real estate.

[00:40:51] And so that is our bread and butter and our niche.

[00:40:53] And we work qualified opportunity zones, syndications, uh, real estate professionals, anyone of that

[00:41:01] nature, short-term rentals, short-term rental loopholes, anything of that nature.

[00:41:05] We assist help on long-term rentals, even passive investors can, can reach out to us because

[00:41:10] we can definitely help and help you strategize on different items, right?

[00:41:13] Like I had a client this year who was working with a CPA and he didn't realize he did, his

[00:41:18] CPA didn't tell him or let him know that, Hey, you have 180 days after the sale of your

[00:41:22] property, do a 1031, right?

[00:41:23] And so that's a lot of capital gains that you get hit with and you, that you weren't expecting

[00:41:27] your planning for.

[00:41:28] So just any interest, if like, if anyone, anyone needs, needs help or wants to work on strategy,

[00:41:33] we're here for that.

[00:41:34] Awesome.

[00:41:35] And we have negotiated a small discount with Hall CPA.

[00:41:38] I'm personally working with you, Nathan.

[00:41:40] It's been fantastic.

[00:41:41] Uh, the link's down in the show notes.

[00:41:42] So highly, highly recommend if you're looking for a new CPA that understands real estate and understands,

[00:41:46] you know, all the ways that, uh, your high W2 earner can offset, um, check them out.

[00:41:52] 100%.

[00:41:53] And one thing I do want to mention too.

[00:41:55] So when you, so right now we're kicking the gain, right?

[00:41:57] So like, that's the whole thing is that we're just like deferring gain.

[00:41:59] We will have to realize, and we want a sweet, we want the sweet piece at the end for the 10

[00:42:04] year hold.

[00:42:04] In the meantime, let's say it's a short-term rental or something, or even just like something

[00:42:09] that you're passive in, in this instance, when that gain kicks in 20, on your 2026 tax

[00:42:15] return, any depreciation losses that you've had that you haven't previously accessed get

[00:42:20] released to offset that gain to help you out there.

[00:42:22] Right?

[00:42:23] So what we can plan around that gain and like find other ways to strategize for it, but also

[00:42:27] any of those passive losses that you have do get unlocked to help offset that gain.

[00:42:32] Okay.

[00:42:33] You got to break that down because this is something we've had a lot of questions on.

[00:42:37] Toby Mathis was on episode 10 and he talked about how, you know, uh, a typical airline

[00:42:42] pilot, W2, not a real estate professional.

[00:42:45] They invest in a syndication.

[00:42:47] It generates passive losses.

[00:42:49] They have no use for those passive losses.

[00:42:51] It just carries forward and carries forward and carries forward.

[00:42:53] And then the deal sells.

[00:42:55] Uh, and Toby was talking about how, uh, once the deal sells, it unlocks it and it's allowed

[00:42:59] to be used for, uh, to offset ordinary income.

[00:43:02] However, my question there is, well, that's great if the deal didn't make money, right?

[00:43:08] Right.

[00:43:08] Because now you've got this loss that'll, that'll transition to an ordinary loss and offset

[00:43:13] your W2.

[00:43:13] But if the deal makes money, it's going to get eaten up offsetting the recapture and

[00:43:17] the gain.

[00:43:18] Right?

[00:43:19] Yeah.

[00:43:19] So, so it's super, super interesting.

[00:43:22] Um, you get to make the election to have it offset the gain if you want to.

[00:43:28] However, this is something that like we see probably, I want to say like 90% of CPAs not

[00:43:33] do properly is you can have an offset ordinary income instead, which is probably better for

[00:43:39] you as a pilots, high W2 earners getting taxed in the 30% tax bracket, right?

[00:43:44] Your capital gains probably 23.8%.

[00:43:46] That's the max, right?

[00:43:47] That's the max you can get taxed at from a capital gain perspective, 25% for depreciate

[00:43:52] for, uh, for 1250 recapture, right?

[00:43:54] Whatever.

[00:43:55] But if you are being taxed at that 30 in that 30% bracket, your CPA can make the election

[00:44:02] on the return to have that offset ordinary income instead and not actually offset the

[00:44:08] gain.

[00:44:09] You can choose, you can choose to let it offset the gain if you want to, but as, as a play,

[00:44:15] let's play Ray arbitrage.

[00:44:16] I'd rather pay 30 cents on the dollar than 20 cents on the dollar.

[00:44:20] Yeah.

[00:44:21] So you want, you can utilize that gain.

[00:44:23] So you have the choice to take that loss that's been sitting on the, on the shelf.

[00:44:27] I believe it's called a suspended, suspended loss.

[00:44:31] And you can choose to use it to offset your ordinary income at that point, rather than letting

[00:44:37] it offset the gain.

[00:44:38] Bingo.

[00:44:39] Absolutely.

[00:44:39] And that's awesome.

[00:44:41] By default, it allows, so within, it's basically just the code says, Hey, when you dispose of

[00:44:45] an activity, which the activity in this, in this case would be your syndication, when it's

[00:44:50] disposed of, it was previously viewed as passive.

[00:44:53] But whenever it's done, it goes, okay, so these, these are ordinary losses that were

[00:44:58] stuck as passive.

[00:44:59] Now that it's done, their ordinary losses are now that it's like, okay, cool.

[00:45:03] Well, great.

[00:45:03] Now it goes and you can let it go hunt for ordinary income, or you can let it offset your

[00:45:09] gain.

[00:45:10] It's up to you.

[00:45:11] I generally recommend that it goes and offsets the ordinary income because that's taxed at

[00:45:16] much higher rates.

[00:45:17] That's awesome.

[00:45:18] Okay.

[00:45:19] So let's talk about, to, to close this up, I want to, I want to circle back to what you

[00:45:23] said in the very beginning is opportunity zones are a way to get the step up in basis

[00:45:27] without dying.

[00:45:29] So let's quickly talk about 1031 exchanges because we've said this on the show before, but you

[00:45:34] can take a property.

[00:45:35] It increases in value.

[00:45:36] You do a 1031 exchange.

[00:45:38] You defer the gain.

[00:45:39] You buy another property and you can do that as many times as you want.

[00:45:43] And there's an amazing estate planning tool that when you die, your kids get the step

[00:45:47] up in basis.

[00:45:48] We've talked about how the tragedy of the 90 year old, who's like, I got to sell all my

[00:45:53] assets.

[00:45:53] I'm about to croak.

[00:45:54] You know, I want to, I want to get these off my plate so that I can give the cash to

[00:45:57] my kids.

[00:45:58] And it's like, don't do that because they have to pay all these capital gains taxes on

[00:46:03] that.

[00:46:03] Whereas if they just keep the assets and let them pass to their heirs, they get, the

[00:46:07] kids get the step up basis.

[00:46:09] They can sell it the next day and pay zero capital gains tax.

[00:46:12] Correct me if I'm wrong on any of that.

[00:46:13] You hit it, you hit the hammer on the nail, a hundred percent.

[00:46:17] Perfect.

[00:46:18] Okay.

[00:46:18] So an OZ is a way to do that without dying.

[00:46:21] Basically.

[00:46:22] Yep.

[00:46:23] You got it.

[00:46:25] And what's, what's going to be fun to see, um, in like over the next couple of months

[00:46:31] is what's going to happen with 2025 tax bill.

[00:46:35] Because a lot of these things are sun setting specifically, like we're talking about qualified

[00:46:39] opportunity zones, for example, bonus depreciations, another thing too.

[00:46:43] So we'll have to see what happens over the next couple of months.

[00:46:47] Qualified opportunity zones are insanely bipartisan.

[00:46:50] There was one Senate member who is not, and he was the one who was basically in charge.

[00:46:53] He no longer is in charge.

[00:46:55] And so on, because of this now, the Senator Mike Crappa will be the head and he is a big

[00:47:01] fan of qualified opportunity zones.

[00:47:03] So it's very likely, even though we have a quote unquote end coming, there's a chance that we'll

[00:47:09] get some new legislation that extends, offers new benefits, gives us some more guide rails

[00:47:14] and maps to figure out how we can do this stuff and maybe new opportunities.

[00:47:18] Right.

[00:47:18] And what's cool is, is now it seems like, you know, when this got pushed through in 2017,

[00:47:22] a lot of municipalities just didn't know how to draw the map.

[00:47:27] Now that they've been around for eight years, uh, the local governments might be a little more

[00:47:33] attuned to how to effectively utilize these.

[00:47:36] A hundred percent.

[00:47:36] And we've gotten now, and like, it's just people, I think a lot with qualified opportunity

[00:47:42] zones is that people just didn't understand them.

[00:47:44] There was like, let's be honest, they're so complex.

[00:47:46] Like whenever I run into a situation, we, I always have to do a little bit of digging

[00:47:51] because every situation is different and every P and like, there's a lot of, there's still,

[00:47:55] we still don't even have regulations and guidance for what happens after the 10 year

[00:47:58] hold period.

[00:47:59] Right.

[00:47:59] We have no idea how that gets reported or anything because it's 10 years in the future

[00:48:02] and the IRS who pushes out that administration goes, yeah, we'll, we'll let the IRS

[00:48:06] in 10 years deal with that.

[00:48:07] So it, there's a lot of like uncertainty with it.

[00:48:11] So I think we're going to get a lot of that.

[00:48:13] Hopefully I don't have a crystal ball, so I can't promise anything, but my reading of

[00:48:17] the tea leaves would be that ways and means already kind of passed and like gave the thumbs

[00:48:22] up to a bill regarding the extension of overseas.

[00:48:25] I imagine that's going to get tossed in a new tax package that we see coming in 2025.

[00:48:30] You know, one thing that that's, that's important to note too, if you're listening to this

[00:48:33] and you're thinking like, wow, what a tax advantage to do this OZ, you got to, you got to understand.

[00:48:39] And as you, as you catch a theme of listening to passive income pilots is tax code is written

[00:48:44] to incentivize behavior.

[00:48:46] And so when you think about good tax policy, I mean, think about what OZs did for certain

[00:48:52] areas of the country.

[00:48:53] It incentivized investors to put money in places that needed it most.

[00:48:58] And so the tax code isn't written for you to pay taxes.

[00:49:02] It's written for you to incentivize certain behavior so that you go make investment decisions

[00:49:08] and take on risk in places that need it most.

[00:49:11] Right.

[00:49:12] So, you know, when you're talking to Hall CPA or you're working with your accountant,

[00:49:16] they're, they're going to be the most familiar with the types of real estate tax incentives

[00:49:21] that are going to incentivize your behavior and investment activity.

[00:49:25] Right.

[00:49:25] So that's, that's at the end of the day, that's what the thousands and thousands of line

[00:49:30] of tax code are there for.

[00:49:31] It's not, there's not 18, you know, there's not thousands and thousands of code on how

[00:49:35] to pay taxes.

[00:49:36] It's how it's, it's the activity that allows you to take tax breaks.

[00:49:40] Exactly.

[00:49:40] And that's the whole point of this, you know, this tax code and these OZ investments.

[00:49:45] So, you know, we love bringing on people like yourself, Nathan, to talk about this so that

[00:49:49] we can open up the possibilities that, that pilots can have them thinking about necessarily

[00:49:55] on how to, how to potentially strategize around not paying taxes by incentivizing their certain

[00:50:02] behaviors in the way that they invest.

[00:50:04] So appreciate your wisdom on that.

[00:50:07] Yeah.

[00:50:07] And I'll throw in one more thing here.

[00:50:09] Just, you know, we always say that you try not to let the tax tail wag the investment dog.

[00:50:15] You don't want to be going out there and investing in a deal just because of the tax benefits.

[00:50:21] The deal should stand on its own two legs, on its own merits.

[00:50:25] But this has been wonderful to understand OZs and the tax component of it.

[00:50:31] So if you find a deal that makes sense on its own and it has an OZ component, I think now

[00:50:37] as a listener, hopefully you have a better understanding of how those work.

[00:50:41] Yeah.

[00:50:41] So Nathan, thank you so much for coming on.

[00:50:43] Once again, if you'd like to connect with Nathan and the whole CPA team, check out the link

[00:50:48] below.

[00:50:48] The number one question we always get asked is like, I need a new CPA.

[00:50:51] Talk to these guys.

[00:50:52] They're awesome.

[00:50:52] And it's all about forward-looking tax strategy, not just having a freak out on April 10th.

[00:50:59] So.

[00:51:00] We're here to help guide you throughout the year and not just file your forms for you,

[00:51:04] right?

[00:51:04] There's a difference between a tax preparer and a tax strategist.

[00:51:07] And we're here to help guide you throughout the year so that you can be aware and take advantage

[00:51:11] of these types of things.

[00:51:13] For me on Tate and Ryan, it was a fun conversation.

[00:51:15] I love talking QOZs.

[00:51:16] I think they're an awesome tax act.

[00:51:17] So whenever I get a chance to like blurb about them, I'm glad to be here.

[00:51:21] Right on.

[00:51:22] Thanks, Nathan.

[00:51:22] Appreciate your time.