OZ Magazine Volume2.1 2.1 | Page 51

THE COMPOUNDING BENEFITS OF OPPORTUNITY ZONE INVESTING

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WHAT IS COMPOUND INTEREST ?

Albert Einstein is reported to have said that “ Compound interest is the 8th Wonder of the World . He who understands it , earns it . He who doesn ’ t , pays it .” I ’ ve often said to my children , tongue in cheek , the only thing you really need to learn in math class is the Rule of 72 and forget the rest . Only half joking . So , what exactly do people mean by compound interest ? Compound interest makes a sum of money grow at a faster rate than simple interest . It does this because in addition to earning returns on invested money , your money also earns additional money on the interest it just earned . The benefit of compound interest in its most simplistic form is to make your money grow faster . The two major components are the length of time you allow your initial principal to compound and the initial amount of principal .

Many investors have realized the benefits of compounding interest as they review their investment returns . However , once you factor in the tax advantaged benefits of investing in OZs , the benefits of compounding and reducing the taxes owed by 10 % on your initial gain tax free until April 2027 , adding in that all the income and gains earned over the ten-year period are tax free , investing in OZ ’ s are hard to beat .

To provide a clear example on the compounding benefits of OZ investing , let ’ s use this example : On a $ 1 million investment , your after-tax returns in an OZ investment are nearly double those of an identical non-OZ investment due to capital gains deferment and other tax benefits !

Let ’ s break this down in a simple chart to really illustrate the benefits assuming a 35 % tax rate and a growth rate that doubles the equity invested over the ten-year period .

TAX EFFICIENCIES OF OZ INVESTING

As highlighted above , investing in real estate can be a highly effective path to financial independence . And that is because it can offer incredible returns and even more incredible tax breaks . OZ investing has provided a steroid shot to the tax benefits of real estate investing .

Let ’ s walk through these tax efficiencies a little deeper . There are four main areas where OZ investing provides tax efficiencies for high-net-worth investors .

1 . Temporary Tax Deferral : Unlike traditional investments , investors can defer tax payments on capital gains that are invested in a Qualified Opportunity Fund ( QOF ) until the earlier of the date on which the QOF is sold or Dec . 31 , 2026 .

2 . Step-Up in Basis : For investments held in a QOF for at least five years before December 2026 , the basis is increased by 10 %, essentially reducing the taxes owed by that amount when you exit the investment .

3 . Permanent Tax Exclusion : The step-up in basis is a big tax advantage but it gets even better if these assets are held for at least 10 years . You are eligible for a permanent exclusion from taxable capital gains from the sale of an investment in a QOF if the investment is held for at least 10 years ! And … You get to be part of investing in the revitalization of America .

4 . Depreciation Tax Shield : The last remaining tax benefit of investing in an OZ is there are no recapture rights on depreciation declared along the way making the income you receive tax free . Unlike other real estate investments where depreciation claimed is recaptured at time of sell , an OZ investment has no recapture of said depreciation .

In this example , an OZ investment provides an $ 1,427,500 advantage , making OZ investing a highly efficient structure for HNW investors .

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