Study Hall: Opportunity Zones Explained with MG the Mortgage Guy

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Opportunity zones, from my understanding, is a way for economic development and low to moderate income neighborhoods, right right, like the hood, but it's not really just the hood. But no, not just the hood, but around like kind of similar type of that, right where they want to they want to have businesses and real estate developments, and they want to encourage people to put money into these areas that may not be funded otherwise.

Right, right, correct, and to create jobs as well.

Right areas?

Okay, all right, So can we start at the beginning as far as opportunity zones, like what exactly is it and how does it work?

Well, the opportunity zone?

So all right, So, if you have capital gains from a real estate transaction that you just sold, and you have to pay taxes on that money, right, if you don't put it into this type of opportunity zone fund or ten thirty one exchange, which is another capital games deferred mechanism right for real estate investors.

So if you sell something, you take that.

Money, you have to pay your capital gains taxes on it right away if you don't put it into one of these vehicles. But the opportunity zone fund is the ten thirty one exchange on steroids.

So now can you talk about what ten thirty one exchanges?

Yeah?

Yeah, So a ten thirty one exchange is if you're selling, say you have a commercial building twenty units and you sell it and you make one hundred grand of profit, right now, you have to pay gains.

On that money.

Now you put that money into the ten thirty one exchange. That way you don't have to pay any taxes. You deferm that capital gains taxes. But now with a ten thirty one exchange, you have to buy a like conditt property to the one you just sold, but you don't pay any capital gains, you don't pay any taxes, you can't touch any of that money, and you have six months to close on a like condit property. That's what you do with a ten thirty one exchange.

So in the opportunity zone that opportunity fund, that's what this is.

That's what this is.

But the Opportunities Own Fund is a ten to thirty one exchange on steroids. And what I mean by that is that you cannot only put you can only you can put real estate capital gains into it. But you also can put if you sell stocks, bonds, art anything that you will be taxed by the United States government capital gains tax on, you can put into the Opportunity Zone Fund and then from there you can invest into an opportunity zone area.

Now from a tax perspective, this is how it works.

You put that money into the capital gain I mean into the Opportunity Zone.

Fund, you get a discount.

If you keep it in that Opportunity Zone fund for at least five years, you save at least ten percent. You keep it in that Opportunity Zone fund for extra two years, you get an extra five percent discount on a capital gain. So you can save fifteen percent on your capital gains. So if you have one hundred k of profit year seven, you're only paying capital gain on eighty five.

Thousand, not the full one hundred k.

Now, if you keep that op that investment into that Opportunity.

Zone for ten years.

And now let's just say you sell that property for a million dollars, right, that nine hundred k of appreciation and equity that you made money on is tax free, and you still only pay your capital gains tax on that original one hundred k, which is now eighty five thousand because you've got that fifteen percent discount, whereas for the ten thirty one exchange, it's you're still rolling that money over.

You're still rolling that money over, and then.

Also all the proceeds from your sale goes into the ten thirty one exchange, but with the Opportunity Zone Fund only the gains portion, so you can get your initial principle back and only invest the gain the gains portion into the Opportunity Zone Fund.

So it's a little bit different than the ten thirty one exchange.

Where all the proceeds have to go into that ten thirty one change, but the Opportunity Zone Fund only the capital gains portion, so you can get back your principle that you put into whatever you put in. So if you put a million dollars initially into your stock market

Yeah.

Yes, so this things it accessible for the everyday person. This is definitely accessible for the every day person. This is a huge opportunity for anyone who's looking to invest in real estate because even if you if you're a

They're improving these areas.

Right.

Another thing with the Opportunity Zone Fund and Opportunity zones, in order for you to have a tax free you have to prove the property, right, So you can't go buy a Class A building and just sit on and get the cash flow and ten year sell it and you you are one hundred percent to all three.

It's a long term play.

So you have to go by the burntown building, the building that needs a lot of renovation, and you have to invest, Like say you paid a multi family of million dollars for it right now, you have to go develop that building for another million dollars in order for you to see the long term, ten year, one hundred percent tax benefit. So a lot of investors are going to over improve these properties in the opportunity zone because they have no choice because they're betting the long term play earners.

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All these properties right, So every day investor can now buy the single family, a multifamily and regular residential property and now they're going to reap the benefits of the appreciation. Now they're going to have to pay their taxes and things of that nature whenever they sell, or they can go ahead and invest into an opportunity fund zone.

How do they do that?

How do they So if they want to say, okay, so, one way to benefit from it is that opportunity zones in layman terms, is going to improve the area, right, so a little bit every most opportunities the area is going to improve absolutely, odds are. So if you buy a house in that opportunity zone, odds are the value of your house is going to go up because the value of that neighborhood is going to go absolutely. So

Well, you can create your own fund with an LLC.

You have to self certify, and everybody in this audience contact your tax professional to learn how to self certify or Google self certify. I'm not going to get into too much details because I'm not a tax professional, But you can create your own opportunity zone fund and you can put your moneyes into your LLC which is that opportunity zone fund. Now and now you can go ahead and to invest into these opportunity zones and reap the

Of get that strategy what's best for you.

But even if you don't put it into a fund or create your own fund, if you're investing into these areas that billions of dollars of capital are being dumped in to create low income housing, new construction, new businesses, whatever you purchase in these areas are going to appreciate at some point. And also what's going to happen if it's rental properties, The rents are going to go up too. So it's you know, it's a double edged sword, so

But opportunity for everyone.

I think one of the biggest misconceptions is that opportunities zones are all in run down areas.

And we live in.

Westchester County, which is a pretty affluent county from the country.

Right nationwise, and they have one of the most racist counties in the country, right, And we have opportunity zones here in cities in Westchester.

And what I'm seeing and most people, if you live here, they're putting up luxury buildings with commercial space at the bottom of them. And they're taking over blocks, not just but like one storefront. They're taking over blocks and putting up these bills so that the appreciation of the value of everything around us goes up. And like you said, the ramp will go up. So what does the average person do to combat that, right?

Do they? What's the next step for them?

The next step is getting the game. You know, it's plain simple, like it's happening before our eyes. But you know, you can't sit on the sidelines right now. Time is not on your side, right, money is cheap. You know, you have listen, everyone, I'm not a fan of forty five right, and I don't think no one here, probably at this table is. And I don't want to get too much into politics, but one thing I got to give them props on is that this is not a.

Bad law that they put in place.

There's still a lot to be said about the law because with any new laws, it takes time for it to really you know, for them to really continue to go through it. They're going to make changes and adjustments and things of that nature. But for the real estate game and anybody who's looking to get in real estate, this is great for us. You know, we can go in here and now invest in these communities and most of them are probably going to be communities.

That you know, look like us.

They're our communities.

They are our communities.

So now we get to buy our blocks back, reinvest in them and create businesses, create jobs, and create appreciation and create that generational wealth and also save on taxes in the long run.

And that's the name of the game, is to save on taxes.

But how can somebody find out where opportunities is.

You can just go to Google. You can google. There's tons of websites out there. But you can google, you know, Opportunity Zone and White Plains, New York and you'll probably see the map that.

Will come up and have all it's definitely good.

Yeah, I mean, listen, we Google, we're in the information and technology ever we'll knee deep into it. So you can just google anything you want with a keyword and get what you want.

But it's all across the country.

Like you said, it's eighty six hundred or in some change of opportunity zones throughout the nation. So there's plenty of opportunities everywhere. And it's not just in the hoods. There's places like White Planes, you have Long Island City, you know, affluent areas that on the census track because the central track is kind of outdated, that still deemed some of these places as low modern income areas. But they've been developed so it hasn't caught up. But it's

Go ahead, you said shout to him.

One of the things he posted was like, you can't call it your hood unless you've bought something in it, exactly, And I'm.

Like, that's that's pretty genious, of course, and it's true.

Listen, we come from these areas.

We all grew up a certain way, right, and we've seen gentrification happen over and over. Look at Brooklyn, look at look what's happening in the Bronx right now. And it's not too many people that are buying these homes and renovating them that look like us, right, There's only

Because they're telling us what they're going to do.

They want to.

Make the hood basically all the outskirts of the hood I appreciate. So we have to take advantage because no one knows these areas better than us exactly, you know, So why shouldn't we take advantage of the opportunity that's in front of us.

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