Demystified Blog Archive #52 – BONUS CONTENT w/ co-author Shahar Plinn
This week Microsoft just announced surpassing Apple. In terms of market capitalization, they are now the largest company in the world.
For shareholders, this presents a HUGE OPPORTUNITY!
There is a hidden gem within the US Tax Code known as opportunity zones.
The example let’s say you have Microsoft stock, and you sell today for a total gain of $250,000.
Ordinarily you’d have to pay tax on that gain.
But if you invest that money in a fund that invests in specially designated ‘opportunity zones,’ which are generally underdeveloped areas, you can push out the tax bill on that $250k for years and years.
And any gains you make on that money in the meantime will be tax free - forever.
So why does this matter?
A decade ago when the Global Financial Crisis broke out, central banks around the world, especially the USA, printed trillions upon trillions of dollars.
That new money wasn’t backed by anything, didn’t produce anything of value, and was not “earned” in anyway.
Just a few clicks. Poof. Money.
And for most of the past decade, interest rates have been at the lowest level they have ever been in all of human history.
Historically, when money comes easily, investors tend to make bad investment choices.
Banks make loans that don’t make any sense, people buy things they can’t afford, businesses go heavily into debt, investors embark on foolish investments, etc.
A greater concern, though, is how overvalued most financial assets are.
In fact, investors have rarely, if ever, paid more for real estate, bonds, or stocks.
This year 83% of IPOs in the United States involve companies that are losing money.
The amount of money that investors are paying for every dollar in earnings, sales, and cash flow for their investments has rarely been higher.
The average “price to sales” ratio in the US stock market, for example, has literally never been higher.
That’s why some of the most famous investors in the world are avoiding the market.
Warren Buffett, for example, is sitting on $116 billion of cash. Buffet is not buying anything right now, patiently waiting for a major correction.
Finding credible investments under such absurd conditions is difficult, but not impossible.
For example, I am in Tbilisi, Georgia at the moment researching a highly liquid, well-capitalized bank in a jurisdiction of only 42% debt to GDP that will hold deposits, in USD, at a 10% rate of interest for amounts above $100,000 (6% for amounts below $100,000).
Personally, I would rather make a safe 6% - 10% than invest in other riskier asset classes.
Huge amount of upside, very little downside. That is my ethos.
When you combine this rate of return with an Opportunity Zone strategy the possibilities are endless.
Here is what Shahar Plinner, CEO, GPL Tax & Accounting has to say about Opportunity Zones…
“So Opportunity Zone is a cool concept!
It’s not for everybody but if you have the patience to sit on a 10-year investment you can get a huge capital gain savings.
Tax free benefit! Unbelievable opportunity!
So, let’s get to the facts first.
If you need to sell capital gains, any kind of gain, even short term, the transaction will be taxed at your ordinary income tax rate. Instead of paying tax now, you can allocate a portion, or all, to an OZ type of investment. Real estate, business, stock, there are many options.
You have 180 days to complete the transaction from the date you sold the capital asset. Then you wait, the deal is done. You exchange your capital gain with OZ asset.
NO tax due now!
Now sit and wait. After 7 years let’s say around 12/2025 you will get a 10% catch-up basis meaning 10% discount in your tax liability.
For example, let’s say I have $100k of capital gains. I will pay tax only on $90k. A net savings of $2,380. Plus, the ability to yield for 7 years the NO need to pay tax on $100k which is $23,800.
Then after 8 years I get 5% more in basis, same concept of savings.
By the end of the 8th year around 12/2026 you must pay the tax. But remember, this is the tax you saved and invested for 8 years. And now, you only need to pay 85% of the original gain!!
But what about the tax on the new OZ investment?
The original OZ investment is tax free.
Yes! Tax Free!
To summarize, the OZ program allows the individual taxpayer to defer his capital gains on the original asset for up to 8 years and get a “hire cut” of 15% of the taxable income. In addition, any new investment into an OZ asset can be completely TAX FREE.
More in your pocket.”
Of course, there is always additional information you should consider when setting up any type of business, finance, or taxation strategy plan. And, you should always be working with a team of professionals to help mitigate the risk of any investment.
To your investment freedom.