Made 800k in stocks in 2020; real estate strategies to lower tax?

[Steven Chen]

The 800k have all been cashed out from stocks and are all short term gains. 

Should I buy several multi family houses in this economy that might experience a recession, and cost segregate it to lower my taxes? Or should I just pay the full taxes and avoid real estate? I am in CA and I have been out of work for some time and this is all my income.

Any suggestions?

[Chris Montgomery]

@Steven Chen I run an Opportunity Zone fund and am happy to answer any questions you have.  I'm not a CPA so can't give personal tax advice but can answer general questions about the program in general or how our fund specifically works.  I'll start with answers to a few of the questions you and others brought up in this thread.

• You can invest any type of short or long term capital gains into a Qualified Opportunity Zone Fund.  There is no requirement for a like kind exchange, so gains from stock sale are fine.  You must invest into the fund within 180 days of realizing your gain.
• You only get the tax benefit on the gains, so you don't generally want to invest your original principal, only the amount of the gain.  This is a nice benefit because you can keep the original principal to do with as you see fit.
• You receive a deferral on the current gain amount until the end of 2026, so you will pay the tax on that gain in 2027.  The way the legislation is currently written you will be paying at the tax rate that is in force for 2026.  Most people expect cap gains rate to increase, so you should factor that in.   Your basis receives a 10% increase when invested for 5 years, which amounts to a 10% tax decrease on the initial gain.  I usually advise people to think of that 10% as a hedge against the likely rate increase.  There is proposed legislation to change the tax rate back to the rate in effect at the time you invest, but we don't know if that will pass.
• If you stay invested in the fund for 10 years, all new capital gains are tax free.  You also avoid depreciation recapture to the extent it exists.  The initial deferral is significant, but this future forgiveness is often the largest benefit.  There is however no tax benefit on the cash flow you receive along the way, other than the usual benefits of being able to deduct operating expenses, interest, depreciation, etc.
• Someone mentioned the ease of starting your own fund.  That's true in regard to initial fund setup, but understanding the rules and the compliance is a real effort.  Makes sense for some people but should not be entered into lightly.
• As @Ronan Donnelly said, you should evaluate any QOZ deal the same way you would evaluate any other deal. The tax benefits are significant but won't turn a bad deal into a good one.
• OZ funds can't invest in already stabilized assets because of the requirement to significantly improve the assets, so as mentioned above you generally won't receive cash flow until the asset is improved and stabilized.  Year 3 for most funds.
• Most OZ funds only accept funds from accredited investors.  

Let me know if you have any additional questions on Opportunity Zones.