EXECUTIVE SUMMARY

What if you could do well by doing good—using your wealth to help revitalize economically distressed communities and enjoying some impressive tax breaks for your efforts? That’s exactly what you may be able to accomplish through a new type of investment called Qualified Opportunity Funds.

In this month’s Flash Report, Qualified Opportunity Funds: The Latest Way to Do Well by Doing Good, you’ll learn all about how Qualified Opportunity Funds work along with their many benefits. Armed with that information, you can start to determine if these funds make sense for you and your goals—and, if so, how to take the next steps.

Qualified Opportunity Zone Investing

Impact investing—using wealth to create positive change in the world while also benefitting financially—has become increasingly popular, as the idea of “doing well by doing good” has gained traction among investors.

Now there’s a new type of impact investment—called Qualified Opportunity Funds—that is worth checking out if you’re looking to build wealth, reduce a capital gains tax, and improve communities across the country. For investors with these goals, the funds can potentially be a powerful part of an overall wealth plan.

Sparking economic growth

Qualified Opportunity Funds invest in properties in economically distressed communities categorized as Qualified Opportunity Zones, which have been targeted for economic development.

These funds, which are generally formed as partnerships or corporations, can own a broad range of properties—from apartment buildings to start-up businesses—that exist in Qualified Opportunity Zones. By investing in these funds, you can help give communities a much-needed economic boost.

Big tax incentives

Let’s say you have a taxable capital gain from the sale of appreciated property (including investment assets, art, real estate, a business and so on). If you reinvest that gain in a Qualified Opportunity Fund within 180 days of the sale, you can potentially receive some intriguing tax breaks. For example, you can:

• Defer capital gains taxes from the sale of the appreciated assets until December 31, 2026, or until the Opportunity Zone investment is sold (whichever comes first).
• Reduce the capital gains tax you pay by up to 15 percent because of an increase in the basis of the appreciated assets used to buy the fund interest.

Important: The basis increases by 10 percent if you hold your interest in the Qualified Opportunity Fund for a minimum of five years. Hold it for seven or more years, and the basis rises to 15 percent.

Bonus: You can eliminate the capital gains due on the appreciation in the Qualified Opportunity Fund if you hold the fund for ten years or longer.

There are some important timing issues here. If you still hold the Qualified Opportunity Fund on December 31, 2026, you will recognize the gain on the deferred amount (taking into account any increases in basis). Therefore, to receive the 10 percent increase in basis, you would have to invest in a Qualified Opportunity Fund by 2021. To get the extra 5 percent increase in basis, you would have to invest by the end of 2019.

BENEFITS OF QUALIFIED OPPORTUNITY FUNDS

The following hypothetical case studies help show the benefits that Qualified Opportunity Funds can potentially bring to different types of investors.

Case study 1: Business owner

Charles sells his business for a $12 million capital gain in June 2018. He locates three properties in two Opportunity Zones with a total purchase price of $12 million. Charles creates his own Qualified Opportunity Fund as a limited partnership fund, and his attorney ensures the partnership agreement contains appropriate language.

If Charles holds the Qualified Opportunity Fund until December 31, 2026, his tax bill the following April will be $570,000—$101,000 less than he would have paid in 2018.

That big reduction stems from the 10 percent basis bump after holding the fund for five years and an additional 5 percent basis bump for holding the fund for seven years.

Bonus: If Charles waits at least ten years to sell the three properties in the fund, any gain on those properties will escape taxes entirely.

In the end, Charles would get these benefits:

• Eight years of federal tax deferral
• A 15 percent reduction on the deferred gain
• Tax-free proceeds on the sale of the qualified Opportunity Zone property

Case study 2: Real estate investor

Tony, a real estate developer who has been working on gentrifying neighborhoods in the Northeast, sold two successful projects for a $20 million gain in 2018. He wants to take on bigger projects, but is reluctant to use bank financing.

Tony has a chance to buy two blocks of Qualified Opportunity Zone multifamily properties neighboring a major medical center. The purchase of the real estate and the development costs for the commercial project are beyond his means. Tony learns about the tax benefits of Qualified Opportunity Zones and commits his $20 million gain as initial capital for his Qualified Opportunity Fund.

Tony wants to use his Qualified Opportunity Fund as a vehicle to attract outside investors to his project, so his lawyers set up the fund as a partnership. Tony and his investors will receive the tax benefits of a Qualified Opportunity Fund on their investment. Tony will be able to attract investors on good terms and tackle a project that would otherwise be out of his reach. Ultimately, Tony gets both tax and business benefits by utilizing a Qualified Opportunity Fund.

We need more business and civic leaders to join us in promoting policies to unleash America's full potential. Policies that incentivize investment in underserved communities, including... Opportunity Zones in the new tax reform law, can encourage support for parts of America that continue to struggle with poverty and job growth.

Jamie DimonChairman and CEO, JP MOrgan Chase (Axios.com OpEd, 3/21/18)

Next Steps

Your first step in Qualified Opportunity Zone investing is learning whether or not it is right for your situation. As a fiduciary advisor, Endowment Wealth Management will objectively look at your situation and advise whether or not Qualified Opportunity Zone investing is a smart choice for you. You can learn more about QOZ investing here: www.endowmentwm.com/qoz

If there is a basis to move forward, Endowment Wealth Management will help you find quality funds to invest in, curated by our experienced team of investment professionals.

If you think that investing in a Qualified Opportunity Zone Fund might be something you’re interested in, give us a call at (920) 785-6886.

Have Questions? Need an expert opinion?

If you have more questions I’m happy to help you! We make getting answers super easy, without having to talk to some high-pressure sales person. Just use the secure contact form to ask a question, or email me directly at John@EndowmentWM.com, and I’ll get back to you via email within 48 hours to help point you in the right direction. I also offer a free wealth discovery meeting where we can discuss your personal situation and make sure you’re on the right path. Remember, it’s free to contact us and we are fiduciary advisors putting your personal needs first and foremost.

Best of Success,

John Weninger, CFP®
Wealth Advisor
Endowment Wealth Management, Inc.

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John Weninger, CFP®

John Weninger, CFP®

John is a Wealth Advisor within the Family Wealth Management area of the Company. He is the first point of contact for our prospective clients, conducting introductory meetings with clients to discuss their family dynamic and wealth management needs. John assumes the role of the client family’s Chief Financial Officer and coordinates with the client’s current professionals (i.e. attorney, tax accountant, stockbroker, insurance agent) to provide an integrated wealth management plan and investment solution that is custom tailored to meet each client’s specific needs. John began his career at Merrill Lynch as an advisor assistant, serving the needs of families & small business owners. He was the founder of Vision Wealth Partners, a Wisconsin registered investment advisor and has been helping families and small-business owners with financial planning and investment management since 2011. His writing has been featured on CNBC, Yahoo! Finance, U.S. News and MyCompanyRetirementPlan.com. John received his Bachelor’s Degree from St. Norbert College majoring in Finance. He earned his Certified Financial Planner (CFP®) in 2017.