Investors have 180 days after realizing capital gains to invest it in an Opportunity Zone fund. Both the gain and the associated tax are invested in to the fund. Capital gains of any kind, including gains from stock or real estate, can be invested. Unlike 1031 exchanges, only gains are invested, allowing investors to extract their original basis. If the capital gain came from a partnership, the investor has until the end of the calendar year and 180 days into the following year to invest.
By investing their capital gains, investors get to defer their capital gain taxes realized today until 2026. This enables the investment of taxes that would have otherwise been paid to the government.
If the capital gains are left in an Opportunity Zone fund for 5 years, a 10% step up in basis is applied (tooltip on step up in basis: a step-up in basis readjusts the value of an appreciated asset, providing a new cost-basis and lowering the tax liability), which equates to a 10% reduction in taxes. After the capital gains are invested for 7 years, an additional 5% step up is basis is applied, totalling in a 15% basis step up. With 2026 being the year tax is owed, 2019 is the last year to be invested for 7 years in an Opportunity Zone fund and receive a 15% basis step up. 2021 is the last year to receive a 10% basis step up.
After 10 years of being invested, all appreciation made within the opportunity zone investment can be realized tax free. That’s 100% forgiveness of taxes for gains made in the OZ, resulting in a large boost (projected around 30%) to returns.
All Four Points funds have a 10 year hold requirement, which realizes all Opportunity Zone tax benefits.
Colorado's population is growing. Increasingly, this growth is occurring outside of the urban areas of the state. The forecast from the State of Colorado indicates that the growth in our target communities are some of the fastest growing in the country. In addition to the increase in full-time residents, the increase in visitation to the state is a huge demand driver transforming the region.
Against the backdrop of tremendous population growth in under-the-radar areas, we formed our investment thesis and launched our first OZ Fund in the middle of 2019. With the increased pivot to remote work enabled by Coronavirus, America is facing the largest and fastest transformation of the labor market since the World War II mobilization. This has accelerated and further strengthened our case by driving an even greater increase in new residents moving away from urban centers seeking quality of life, affordability, and access to the outdoors. Alongside this, the way people travel is changing, and outdoor hospitality is poised to thrive at the expense of traditional lodging.
Population growth is the underlying driver to our investments, but our specific focus on comparatively small markets, combined with our unparalleled exposure to under-the-radar projects, creates the opportunity to generate outsized returns versus a fund targeted on more obvious markets. Our team has the operational, geographic, community, and Opportunity Zone investment expertise to create efficient and outperforming investments in these areas.
We invest across Colorado communities outside of the Front Range (Colorado's metropolitan corridor). The equity exposure of each OZ Fund is targeted to be 80-90% multifamily housing projects and 10-20% outdoor-focused hospitality projects, which are typically a combination of development and redevelopment. A grand majority of our multifamily investing is ground-up development. Although there may be a similar number of projects across both themes in each OZ Fund, the multifamily projects are much larger and hold a lion's share of the equity exposure.
Targeted markets for housing demonstrate undersupply of rental housing, steady and growing population regardless of the pandemic, and are adjacent to both outdoor recreation and public investment in infrastructure. Targeted markets for outdoor hospitality locations are within close proximity to tourist attractions and outdoor recreation hubs.