Tax Update 3-2-18 Opportunity Zone

January 7, 2019Evergreen Q4 2018, News

Woodstock Quarterly Newsletter / Q4 2018

What You Don’t Know About Social Security Could Hurt You

A Closer Look at “Opportunity-Zone Investments”

In discussing various tax advantaged programs with the next generation there is nothing as important as their understanding the US social security program. A recent article discussed what most Americans don’t know about social security.[1] The key idea is that you need to work to benefit: “monthly benefits are calculated based on your 35 highest years of earnings”.

As the article points out, if you don’t have a 35-year work history, zeros are factored in for each year you didn’t earn money. If you’d like to have some flexibility at age 60, better fill in those years from age 25 on. The other central principle is that social security is “technically designed to pay you the same total lifetime benefit regardless of when you initially file”. However, this is predicated on an individual living “an average life expectancy”, lower 80s for men and mid-80s for women. The fact that almost 2/3rds of Americans take social security when first eligible and before full retirement age means that “technically” they believe they will live less than an average life expectancy. That “live for today” attitude unites the majority of older Americans with the majority of their much younger brethren.

Sometimes we feel like we should arm you for cocktail party chatter about new tax advantaged investments. One of the new tax law’s sections offering tax benefits to us all is called “opportunity-zone investments”. The idea is that anyone with capital gains from almost any source can defer taxes from the realization of that gain (i.e. you sold the family jewelry) by investing the proceeds in real estate in disadvantaged US neighborhoods, meaning most inner cities and the whole of Puerto Rico. It has excited the real estate industry and several specialized funds have already been formed. The expectation is that opportunity zones will attract $100 billion of private investments.[2] While we don’t rely on government analysis of investment opportunities, they are required to estimate the “cost” to the government of “benefits” within the tax code. Their estimate of lost revenue between 2018 and 2022 is $7.7 billion. On $100 billion that’s an acceptable return, however the key word from above is “deferred”. “The cost will shrink to $1.6 billion over 10 years as deferred taxes are paid” meaning the government will recoup most of what you might have thought you didn’t have to pay. The actual benefit from this investment idea, besides doing good, is now predicated on the actual real estate investment in the opportunity zone doing well. This is not a foregone conclusion and will actually require much work by the investor, unless you believe all that the commissioned real estate professional tells you.

If you or any of your other advisors have questions about the issues raised here, please contact your investment manager or one of us.

William H. Darling, CPA – Chairman & President
Jeanne M. FitzGerald, CPA – Tax Manager

[1] The Motley Fool, 7/10/18
[2] WSJ 10/1/18