Accelerated depreciation in a qualified opportunity zone fund

[Alton Johnson]

I've been deeply immersed in researching real estate investments since I recently had a business sale that resulted in substantial capital gains. As I explore my options, I'm particularly interested in funds like Trilogy and others that offer potential tax benefits.

My question revolves around the deductions available through these funds based on the investment amount. While I can appreciate the long-term benefits of holding investments for around 10 years and the potential for a favorable IRR, I'm unsure if it makes the most financial sense to invest a significant portion of my capital gains in them right away. It seems that to make a significant impact on my capital gains taxes, I would have to invest the majority of the funds.

Instead, I've been considering the option of finding a real estate investment that allows for accelerated depreciation. This approach could potentially enable me to deduct more than just my out-of-pocket costs, providing additional tax advantages if I'm understanding this correctly.

I'm keen to hear from those of you who are familiar with these types of funds, particularly when it comes to the deductions they offer. Does investing in a qualified opportunity zone fund genuinely help with capital gains while also providing long-term investment benefits? Alternatively, have any of you opted to join a real estate developer on an LLC and invest directly in qualified opportunity zones, taking advantage of accelerated depreciation and other tax benefits?

I hope my question is clear, and I'm grateful for any insights or experiences you can share on this topic.

Thank you in advance for your valuable feedback!

[Brandon Bruckman]

These are good questions @Alton Johnson.  The QOZ funds will provide capital gains tax deferral until the end of 2026.  Then the tax bill is due.  After 10 years the gain on the OZ becomes tax free.

These funds do offer economics associated with the project.   Since most of these projects are ground up construction, you can think of the economics in that way. 

We do believe there are passive loss benefits associated with QOZs.  Its complicated and you will want to run that past your CPA.

The other option you mentioned, buying real estate and utilizing accelerated / bonus depreciation, could work.  Or you could consider a combination of both a direct investment and QOZ.  This is spreadsheet exercise and ultimately what you are most comfortable with.