First off, I AM NOT A CPA. After you read this article, copy it, cut it out, or take the magazine to your CPA to look over. I am, though, a licensed commercial real estate broker and business broker, and what I’m going to summarize below could, I repeat, could, save you money tax wise, and maybe get you more prepared when you’re thinking of Selling Your Club, or where you might want to look for your next acquisition.
Trump’s tax cut bill really did help small to medium businesses across the country…and guess what, for the most part, you and your Club are probably classified in the SMB range of businesses. There is plenty of information out there your accountant has for you about all the goodies you should or could be claiming for your operation.
But, buried within the Tax Cuts and Jobs Act of 2017, is a section dealing with what are described as Opportunity Zones and Funds. It’s a section and program that did not get a great deal of attention because it was a relatively brand-new idea, the IRS had to have about a year to put together rules on OZs, and that brought it right up to about now as you’re reading this. The shutdown fell right when the rules were supposed to be codified and locked in, so some of this that I write on February 14 may be outdated by the time you read this, but the basics are locked in place:
In short, Opportunity Zones, are bona-fide, on-shore, tax shelters for ANY kind of capital gains, and they are step beyond a 1031 Exchange:
Experienced or knowledgeable Owners are probably familiar with 1031 or Starker or sometimes called “Tax Free” Exchanges of what are called “like-kind” real estate. (If you don’t recognize the above terms, look ‘em up or touch base with your CPA.) The essence of a 1031 Exchange is to take the capital gains value of just about any kind of commercial or investment real estate sale-except your home-and plunk it down within an up to 90-day period in another piece of qualifying real estate-again nothing you would reside in. You can swap raw land or any kind of building for another any kind of building or another piece of raw land anywhere, doesn’t matter whether it is income producing or not-just that it is “investment” oriented. There are a bunch of steps you have to go through, there are documents that have to be chronologically arranged, you will have to engage a trustee called a Qualified Intermediary, blah, blah, blah…but you do get to NOT pay Uncle Sam 100% of your capital gains on that real estate, if it’s done right, timed correctly. Just about anytime you have over as little as $10-15 thousand in potential capital gains on real estate, you at least want to run it by your accountant. Most important caveat/takeaway: Do Not EVER Sign any buy-sell agreement on your real estate until your CPA has had time to look over the deal to see if you could benefit from a 1031 exchange. It is your freakin money, you decide.
Commercial real estate brokers get drilled in 1031 Exchanges, we do them for our clients on a case by case basis, they’re not for everyone, but when used properly they do work well. (FYI: A lot of the stepped-up value of Trump holdings has been through 1031’s)
Now comes along Opportunity Zones (and Funds) sponsored by Senator Tim Scott (R-SC) in 2017.
Several key items to keep in mind:
ANY Capital Gains can be rolled into or for an Opportunity Zone Fund. This means that whereas a 1031 Exchange MUST BE LIMITED to REAL ESTATE based on both sides, this is not the case with OZs. The capital gains that go into an Opportunity Fund can come from the sale of a business, or any stock, or artwork, or ANYTHING of value that is going to incur capital gains liability-and that could include the capital gains on the Sale of the Business of your Club! Hmmmm….
“Qualified opportunity zone property includes qualified opportunity zone stock, qualified opportunity zone partnership interests, or qualified opportunity zone business property.” (This means either businesses or building)
Opportunity Zones were identified in EVERY State, by governors’ offices last year and the year before. They are specific to lower income or economically depressed areas, or areas that have been identified by each state as deserving of more focus of investment money into that area. Just for grins one night, I ran a test on about 12 random states, then punched in some zip codes within which there I knew there are either groups of Clubs or a Club or two. Just in a quick test, 7 popped up with OZs with Clubs in their area….and if you think about it, of course it makes sense. This is not rocket science.
Opportunity Funds are Funds that YOU set up that can be set up easily by your attorney/CPA. The Fund does have to be certified and monitored. 90% of the Funds must go to investment of either businesses, equipment for businesses, or buildings within up to 180 days. This is the essence of where the Capital Gains (CG) goes from your sale of whatever-Again: talk to your CPA and/or attorney. There of course is a lot of small print to this.
So What? What are the Benefits? 1. Once you self-declare that you intend to invest in a QF, that CG liability is deferred up to 10 years into the future. If you hold your capital gains in this Opportunity Fund for a minimum of 5 years, you get to shelter 10% of your CG from taxation. 2. If you go for 7 years, you get to hold onto a total of 15% of your capital gains. That is fine and dandy. 3. And if you go for a period of 10 years in the OF, then 100% of the capital gains on the sale of your holdings in the OF are sheltered. To summarize, the up to 15% shelter of the CG for holding for that 7-year period, and even more the long-term benefit on holding at the 10-year time period.
Not acceptable or prohibited properties or businesses: (I kid you not!)
- a private or commercial golf course (sorry, Don!)
- a country club (ditto, Don)
- a massage parlor;
- a hot tub facility;
- a suntan facility;
- a racetrack;
- a gambling facility; or
- a liquor store.
As of this writing this is the most up to date list of no-go’s. Do I really need to fill in the blanks for you on this? Smiley Face goes here.
To summarize: Talk to your CPA and/or your attorney! To those of you who are slowing down, thinking/planning to sell not just Real Estate, but anything that is going to generate a fat chunk of Capital Gains Liability, this program offers a way to not give all your capital gains to the government. For investors with CGs leaning forward looking for that next acquisition in maybe our particular industry, or anything else that will qualify geographically, this is a seriously effective tool for you and you CPA to consider
If you regularly touch base with a knowledgeable commercial real estate broker, ask him or her about this. A residential broker is just not going to be professionally focused on this stuff.
This program honestly in my humble opinion is a sleeper that offers so much real opportunity, on both the Investment side and the Capital Gains side, that this program may have more real long- term impact and benefits than the tax cuts in the Tax Cuts and Jobs Act of 2017.
Again, this is JUST an OVERVIEW. What I’ve put to you is merely a framework, merely a guidepost on where this might benefit our industry or you personally. If you want to contact me on some of the links, websites, articles I used to research this article, see below. Thanks, y’all. See you in Vegas, Baby!
*reprinted with permission from ED Publications