One of the founding principles at Parcion Private Wealth is our belief that in order to serve our clients – especially those seeking to optimize wealth events – we need to have a wide array of tactics, options, and strategies available that go well beyond what many retail financial-service advisors can offer.

Wealth events are often a once-in-a-lifetime occurrence. We have helped business owners prepare to sell their business interests, real estate investors liquidate their holdings, and technologists exit now-profitable startups. In every instance, helping clients manage wealth events remains our chief purpose, setting the foundation to achieve their long-term goals.

Successful wealth events can naturally lead to business owners owing the most taxes of any year of their life. It is often also an opportunity to mitigate more taxes than at any other point in a business owner's lifetime. One of the tools we have used successfully to help mitigate the tax implications of wealth events is the prudent application of Qualified Opportunity Zone Investments.

WHAT ARE OPPORTUNITY ZONES?

At their essence, Opportunity Zones are economically distressed areas the federal government has targeted for redevelopment. Created in 2017 as part of the federal Tax Cuts and Jobs Act, the program is designed to provide tax incentives to those who invest in the growth and revitalization of underserved and economically distressed communities.

Today, there are more than 9,000 Qualified Opportunity Zones across every U.S. state and territory.

WHAT ARE THE BENEFITS OF OPPORTUNITY ZONE INVESTMENTS?

Opportunity Zone investments are a powerful investment tool that, when used properly, can defer, and potentially reduce, taxable gains from the sale of business or property, or earnings from the sale of an investment.

Depending on circumstances, this option can allow our clients to:

• Defer capital gains from the sale of most appreciable assets until December 31, 2026, or until the investment is sold, at which point the gain is taxed.
• Reduce the capital gains tax by up to 10% due to the increase in the basis of the appreciated assets used to buy into the Opportunity Zone, or Qualified Opportunity Zone Fund investment, if invested by December 31, 2021, and held for more than five years.
• Completely eliminate the capital gains on any appreciation of the investment if held for 10 years.

HOW THEY WORK

Investors who participate in Opportunity Zones generally do so in one of two ways: either through a Qualified Opportunity Zone Fund or as a general partner in a specific Opportunity Zone development. Each option offers varying risks and rewards.

Funds, for example, allow investors to diversify risk by having the investment dollars spread among a number of properties. Individual projects can potentially bring higher returns if successful, but the lack of investment diversification can add risk.

QUALIFIED OPPORTUNITY ZONES — KEY DATES AND MILESTONES

Initial Investment Timing: Initial investment into QOZ fund(s) must be made within 180 days of original capital gains realization date.

Important QOZ Program Dates to Note:

• December 31, 2021 — Last date to invest in order to take advantage of the 5-year, 10% cost basis step-up
• December 31, 2026 — Date by which you are required to recognize the (reduced) capital gain on your original investment
• December 31, 2047 — Final date to liquidate QOZ Fund investment to avoid capital gains tax on underlying holdings

The Investment Timeline:

• Initial Investment — Investor rolls over original capital gain from a previous investment into a Qualified Opportunity Zone
• Year 5: 5-Year Basis Step Up — Investor receives a 10% step-up in basis after holding QOZ investment for 5 years
• Year 7: Tax Day — Investor pays tax on deferred original gain recognized in initial investment
• Year 10: 10-Year Holding Period — Elimination of capital gains on any appreciation of QOZ investment if held for 10+ years

WHAT INVESTORS SHOULD CONSIDER

An Opportunity Zone investment can be a powerful tool to defer, reduce or even eliminate capital gains taxes, but it also comes with specific considerations. Perhaps most significant is the investment duration. Investors will enjoy the full benefit of Opportunity Zone investments after a ten-year holding period, a long investment period which may diminish this tool's attractiveness for some investors.

On the plus side of the equation, many of our clients appreciate the double benefit of investing in Opportunity Zones; along with the tax benefits, clients appreciate that the investments help improve economically underserved areas.

These are just two considerations of many. Opportunity Zone investments can be complex investment vehicles and are not suitable for all investors. Please consult with your tax advisor for guidance specific to your situation.

This content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein constitutes a solicitation, recommendation, endorsement, or offer by Parcion Private Wealth, LLC to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. All content is of a general nature and does not address the circumstances of any individual or entity. Only private legal counsel may recommend the application of this general information to any specific situation.

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This report was written by Russ Alan Prince and John J. Bowen Jr. It was published by the VFO Inner Circle, a global financial concierge group working with affluent individuals and families, and is distributed with permission. Copyright 2022 by AES Nation, LLC. All rights reserved. The views and opinions expressed in this report are those of the authors and do not necessarily reflect the views of Parcion Private Wealth, LLC. Parcion Private Wealth, LLC has not independently verified the information, data, or conclusions contained herein. Distribution of this report by Parcion Private Wealth, LLC does not constitute an endorsement of its contents.

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