Qualified Opportunity Zone creates TAX FREE Self Storage Profits

The only thing I like better than Self Storage Profits are TAX FREE Self Storage Profits. And that's what this post is all about.  For the last 10 months, I have been getting smart on and executing what I think is an INCREDIBLY powerful investing strategy. Its been quite the process and I know we are all busy enough so I will try and distill this down to the highlights. 

My hope is that You, dear reader, can walk away from this post with a working awareness of how Qualified Opportunity Zones can compound the already huge impact that self storage investing can have on your life. Here's my story.

Back in August of 2018, I sold a Storage Facility in Central New York State.  That sale brought with it a $1 Million dollar capital gain.  I had looked at doing a 1031 but because one of my primary goals was to get out of debt, that strategy wasn't a good fit for me. Simply deferring taxes and kicking the proverbial can down the road wasn't a compelling enough reason to keep the debt that I was looking to eliminate.  As such, I decided to just bite the bullet and give Uncle Sam his cut.  As you might guess though, that looming $300K tax bill became harder to ignore as the end of the year approached!  

Fortunately for me, I stumbled on what was (and is) a relatively new government program on December 12th of last year.  So, up against a ticking clock, I dove head first into learning everything I could about Qualified Opportunity Zones (QOZ) in hopes that it might be a good fit for my situation.  Long story short, it was!  So I decided to create my own QOZ Fund.

By doing so, I was able to move $750K of the $1 Million gain mentioned above into the Fund and defer the taxes on it (for 8 years; at which time 85% of the $300K tax bill will come due). The difference between this deferral and that offered by a 1031 exchange is that I DID NOT have to stay in debt to take advantage of this benefit.  On top of that, the QOZ fund brings with it a 15% True tax SAVINGS if I own the Fund for 7 years or more.  That's not the end of the story though, it gets better... much better.

In April of 2019, I sold another Storage Facility. This sale brought with it another $750K in capital gains.  I moved $250K to the QOZ Fund to achieve the same tax treatment outlined above.  With that, we've kicked a total of $1 Million in capital gains down the road 8 years which is nothing to sneeze at. But again, there's much more to the story and though its a bit cumbersome, the end results will be well worth the trouble so hang in there with me.

A full explanation of the ins and outs of how the QOZ program works is beyond the scope of this little post but here's a cliff notes version.  Once you fund a QOZ (with gains), that money must be invested into certain government identified census tracts.  Furthermore, the investment must substantially improve any property that you invest in.  In other words, you must spend at least as much improving the property as you spend to purchase it (exclusive of land).  While these added criteria make finding a deal a bit tougher, jumping through the hoops is well worth it and here's why.  If executed properly, EVERY penny of capital gain realized from this NEW investment in a QOZ will be 100% TAX FREE as long as the investment is held for 10 years or more.  What that means is that not only will I defer taxes and ultimately save 15% in taxes on the original $1 Million dollars in gains that I moved into the fund but any appreciation in Value of the property bought within the QOZ Fund will be TAX FREE.  Our projections show this QOZ Fund Property should be worth $2-$2.5 Million by 2029 which means we will effectively pay $0 in taxes on a $1-$1-5 Million dollar gain.

Still with me...I know this is a bit in the weeds but this article is just meant to be a primer for you.  My hope is you will find enough value here to compell you to dig into QOZ's more deeply.  

Here's the last (and SUPER valuable) piece of the puzzle. As the owner of the QOZ, I am permitted to personally benefit from the depreciation that our QOZ property experiences during our course of ownership.  And it just so happens that $350K of the $1 Million fund will be spent on things that are eligible for BONUS Depreciation. That means I can write off the entire $350K this year AND as long as I hold the property for 10 years, that depreciation will NEVER be recaptured! If you're keeping score at home, that means that $600K ($250K in QOZ contribution PLUS $350K in bonus depreciation) of the $750K gain I realized by selling the second storage facility this year will be shielded from taxes for at least 8 years and as long as FOREVER!

I hope I articulated all this well enough for you to start to wrap your head around this relatively cumbersome program.  I, quite literally have had to make this up as I went along.  We began executing this strategy before the IRS had even fully articulated the regulations.  Fortunately, everything is falling into place!

I'm hoping this article will spark a bit of conversation so please ask questions and comment below for our collective benefit!

In case you are wondering, we used the QOZ fund to purchase the 70,000 square foot of warehouse space pictured above. We are converting 45,000 to self storage in our first phase (roughly $800K total) and will spend the remaining $200K getting the second 25,000 square foot warehouse ready for a single tenant. Purchase price was $265K.

Don't forget to comment and ask questions below...its how we all learn and is what BP was designed for!