Jason Hartman starts the show with investment counselor Adam as they talk about the upcoming Meet the Master’s event. Adam reflects on what he has learned since the last event and how he has implemented what was taught over the past years. Then Jason brings on Venture Alliance member Mike Zlotnik to discuss a new trend in real estate investing, Opportunity Zones. They define Opportunity Zones, discuss the pros and cons as well as the tax implications.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors.
Jason Hartman 0:52
Welcome, this is Episode 1108 1108. This is Jason Hartman, thank you so much for joining me today and I am coming to you from South Florida. It is absolutely beautiful, gorgeous here. Boy, you can really see why people from around the world come to Florida to vacation. It is just just a beautiful place but in the summer, not so much. Not so much in the summer. Okay, well hey, today we are going to talk about something very, very important. And we want to make sure you do not get scammed, or maybe scammed is not the right word. But we just want to make sure you don’t lose money. And you don’t have a bad experience because the promoters, the sharks, the charlatans, they are out in force because they’ve got a new buzz phrase, a new buzzword phrase. And that phrase is opportunities. The opportunity zones to invest in right i’m not saying this as all bad. But you’re going to see today in part one of our interview with one of our venture Alliance members who is a very well informed person on most things or, or certainly financial and real estate oriented things, you’re going to see that these opportunities, own promoters, you better watch out, you really better watch out, because it’s just like the people promoting these foreign investments. You better watch out, okay, you’re really better be careful, because there are a lot of flaws, a lot of potential pitfalls. And we’re going to tell you about those today. Now, if you’ve been listening to me for the last 14 or 15 years, you probably know that I am a pretty conservative investor. And I’m not very susceptible to hype. I used to be used to fall for every thing that came along the investment does your My business and that was in my, you know, personal investing life for my own portfolio. And in my businesses, I would fall for the marketing program does your, you know, like the soup? disord? What is the soup of the day? What is the marketing program of the day? What is the investment of the day, maybe I have just become so jaded because I’ve been burned quite a few times. I’m trying to, you know, balance this with being open minded, because some things that are offered out there really are good things. But usually, the test of time will tell you whether they’re good or not. There’s always a new thing. So watch out for these people that are always promoting the new new thing, you know, like it’s some big deal. You know, you got to stop everything and stop your nice traditional, slow and steady strategy that slow and steady wins the race. Life is a marathon, not a sprint. You know the parable of the tortoise and the hare. So that is very important to keep that up. Mind. Before we start part one today on opportunity zones, I am joined by our client. You’ve heard him on the show before and that is Adam. Adam, welcome
back. How are you? I’m doing well. And you know what opportunities zones, they never say if it’s a good or a bad opportunity, it’s just an opportunity.
Jason Hartman 4:19
Love that. That’s really good. I didn’t know you were gonna say that. But that’s a good one. Yes, opportunities can be good or bad or even neutral. I really hate the name of this thing. The name opportunity zone implies that it’s somehow Good. Now, that’s the name of government gave it but these things are so flawed. It is mind boggling. And there are, you know, really two primary ways in which people can invest Of course they can buy their own properties and be direct investors. I would always recommend that over the next strategy, which is a fund. There are many fund promoters out there promoting these opportunities. And, you know, maybe I’m just dense, but I don’t get it. I’ve been looking at this for Gosh, has it been a year now? And I have looked at the areas, the blighted areas, I have looked at the tax strategy. I always reserve the right to change my mind. Look at it’s kind of like I don’t really like condos very much. But if the deal is good enough, I’ll buy a condo. There’s just got to be an offsetting factor that makes it so good that you can’t resist it. And I don’t think the tail should wag the dog. I think an investment needs to make economic sense. before tax benefits before tax benefits. These things are being sold like there’s some sort of panacea, some great, great cure and they’re just not and our listeners are going to hear about that today. But Adam, we’ve got meet the Masters coming up. I’m very excited about this, and tickets have been selling like hotcakes. We also want to get to a good listener question. And here from Christina rule. So that’ll be coming up in a moment. But I just thought we’d kind of recap a little bit on last year’s meet the masters. Adam, you were there. That was your first meet the masters. Yeah, wasn’t it?
Yes, it was my first then well, I will say First off, I do love me good. hotcake. But yeah, it was
Jason Hartman 6:18
all the tickets are selling.
Well, I wouldn’t suggest eating them like hotcakes. But the meet the Masters last year was great. I had a great time. There were a lot of people there who I you know, I’d never really been to a real estate investing conference before. So I got to meet a lot of the other clients and speak with them and sometimes feel better about myself and sometimes feel not so great about my investments. But it was, it was good to hear me. I’m happy with my investments. But sometimes like, man, If only I’d bought back then. Yeah,
Jason Hartman 6:51
that’s true. The Reluctant investors lament you know, everybody would have been better off by starting earlier. Right. But are you saying that some of our clients were working bragging about their investments? Were they making you feel bad?
No, it was a it was the lady who won whose name I’m forgetting a top of my head who won the five year plan. That’s Michelle, Michelle. She was, you know, when I was watching her video, and it was describing how much cash flow they were getting per property. I was like, Oh, I’m not getting that much. But then I started thinking I was like, Well, once we’re able to up our rents a couple of times will be in that range. Hopefully, assuming the property taxes in the area, don’t go through the roof, you know, if she’s been in the game longer than I have. So you know, in four or five years, if I’m able to up my rent 25 3040 bucks a year, then I’ll be in that range. So it kind of just provided a perspective, but
Jason Hartman 7:42
it was good. Well, you know, Michelle Hawkins, who you’re talking about, and her husband, they started earlier. So that’s what happened. So don’t let that little green eyed monster of jealousy and envy get you just just follow your own path and do your own thing and, you know, time will fix all of the challenges. That’s, that’s the incredible thing about income property. You know, when I’ve been sad about a relationship ending with a girlfriend over the years, you know, of course, that’s happened many times too many of us, you know, I kind of try to buy the same time heals all wounds, right? It really does. You know, in the moment, if something bad happens on one of your properties, and you’re not even talking about that I understand, you’re just saying they’re not as good as Michelle’s investments in that example. But with income property, you know, all you have to do is just wait, you know, success is largely a matter of hanging on after others have to let go one of my favorite quotes, and so it’s just great that just time will will solve your problems. You know, it’s an amazing thing. It really is.
Yeah, I mean, it’s been good for us so far. So we’re gonna we’re keep it on the path. We just closed on our most recent house back in late December. So we’re, we’re working our way towards, yeah, where’s the latest one, you know, we bought our first Jackson, we had a couple in Memphis but we bought our first in Jackson. So we’re venturing into that market now. What do you mean your first you mean your last one or no, it’s our first house in Jackson. Oh,
it’s our first and Jackson.
Jason Hartman 9:12
Okay. Okay, so now you’re in to market. Right? Okay, so Jackson, Mississippi, Memphis, Tennessee. Good stuff. Good stuff. Any other takeaways from meet the Masters there were so many you were on on the air for meet the masters. You know, on the podcast, we should probably bring back a couple of those clips just to intersperse them in the show because we’ve got this new meet the Masters coming up, folks. I just want to tell you right now, we’re not going to have ron paul speaking there. Again. That was our 20th anniversary event. This event will not be quite as high budget as that one was that was a special one. So when we do our 30th anniversary, yes, we’ll pull out all the stops. And, you know, we’ll we’ll hire really expensive famous speakers again. We’ll have some great speakers at this one. You won’t see ron paul fair, okay. Unless he becomes a client starts investing and wants to come. But you know, he won’t be on stage.
What I got most out of it was in the property management panels and discussions about that. I got a whole lot out of that, that I brought back and had been using in the past year. I think our property manager might hate us right now, in some ways, because I just kept asking them questions, and got on him. And I was like, Hey, what about this? Hey, what about this? What about this? And I think they kind of got tired of answering my emails at some point, just because I’ve been doing some of it. But then when I got there, it was kind of hammered into my brain that hey, they’re your employees. Yeah, make them as accountable as an employee. And I really took
Jason Hartman 10:46
that and they’re not there. They’re not technically or embrace or stare your contract or they’re your agent, but I get the idea. You know what you’re saying? And, you know, I just want to say something about that, folks. If you’re in the world, and you’re not Making some waves. And I’ll just say it, it sounds kind of tacky. But you know, if you’re not pissing some people off, you’re not doing anything. Okay? Don’t be afraid to bug the people to insist on what you want. Because you are a proxy for the person who comes after you. So you really are by having high but reasonable at the same time expectations and holding people accountable in business and life. You are basically making a contribution to humanity. I hope you understand that. Okay, maybe some of you remember when we had Larry Winget. I believe that was his name on the show before and he’s kind of this you know, boisterous sky and he’s like, you know, don’t put up with bad service and don’t do this and that and, you know, just have expectations and make these people perform and hold them accountable. You know, if if someone takes advantage of you hold them accountable, because I’ll bet you, they’re going to think twice about doing that to the next person. So by doing that you really are doing a service for humanity, for the industry, for your fellow man. And if you’re just sort of, if you have the attitude, well, you know, I don’t want to get into an argument about it or something, you know, or I want them to like me, you know what that really is at its core. That is a selfish idea. Because it says, Well, hey, you know, you don’t want to go out on a limb at all, you don’t want to be, you know, have a confrontation, to hold this person accountable, you know, make people keep their agreements, make them honor their contracts
for even not even just that necessarily, but just explain themselves like with ours, we had them come in and say, hey, these repairs need to be made. And one of them was the porch light was dangling off of the porch. And so I just asked simply, they want that Fix that’s great that they want it fixed. But How on earth did that happen? Yeah, right. Lights don’t usually just fall off the ceiling they’ve been attached to for years. Good point. So tell me how that happened. And the response from the property manager was okay, we’ll fix it for you.
Jason Hartman 13:14
Yeah, right. Right. without charging, right. Yeah,
without charging me. So I just said, why, you know, ask the tenant, how that happened. I want an actual reason. And I’ll fix it happily, if they didn’t break it. If it’s a righteous reason,
Jason Hartman 13:28
you know, the reality is the tenant broke it. That’s what happened. And that is the tenants responsibility. Hold your managers accountable, hold your tenants accountable, you know, hold the seller accountable and make people do their thing, you know, don’t allow people to be slackers, and don’t allow them to gloss over things. Everybody needs to develop a certain amount of tact, obviously, and doing this right. I mean, it doesn’t mean you should be rude or, you know, difficult but just push a little bit I and I’m saying this to the person who doesn’t push enough you know some people are way too pushy and overbearing and obnoxious and you know if you’re that person just forget about what I just said okay? Because you don’t need that you need to tone it down a bit. So you know look at I mean, just use sensory acuity and and know where you are but Adam, I completely agree with you. So the invoices and explanations is not being too pushy. So, ya know, feel free to do that. It’s your money, and you you have an obligation to protect your money. I remember years ago, when I was in church in Newport Beach, the pastor was talking about how we are the trustee from birth to death. We don’t take it with us and we come into the world with essentially nothing right. And our obligation, certainly to ourselves, but also to you know, are the stakeholders in our life usually Our family is to Be a good steward of that money, that money is a resource. It’s basically the result of time. And so you’ve spent time to earn that money. And if you don’t hold people accountable to do the right thing, then you’re allowing them to steal your time, in essence, and what else is your life but your time? Okay, that’s all it is. So, so yeah, protect that. You deserve to? Yeah, absolutely. So you got a lot out of the property management panel. Let me answer those. Yes, I did. Good. Good stuff. Okay. Hey, we’re going long already. Let’s do one question and get to the first half of the opportunities own talk and by the way, listeners, meet the Masters register at Jason hartman.com. Slash masters Jason hartman.com. Slash masters. Get your tickets. They are selling fast, fast, fast. We’ve still got early bird pricing at the second tier of early bird. We are pretty sure we are going to do the show five days a week. Okay, so we will do a special part two of this episode tomorrow, which normally we’ve been publishing just every Monday, Wednesday and Friday. And we’re going to go to five days a week. So tomorrow is Thursday. And we will have a, you know what you’d call today and bonus episode on Thursday. But we’ve just got too much to talk to you about. So we’re going to five days a week. Okay, so that’s coming. But let’s dive into part one here, right after this question from Christina rule, right? listener.
Christina says that she spent the last two years listening to the podcast, so welcome, and thanks for sticking around Christina. And she was saving for her first property when she realized that buying a farm was what she wanted to do with the profits of the investments. So her husband and herself bought a 35 acre tree farm raising seedlings and selling them bare root online, extremely close to a city that is expected to double in size in the next 15 years. The business is small, but they expect to grow it considerably and they would love to hear How to evaluate a piece of land as an investment, or how to figure out the rate of return on a home purchase when the home is also your business slash land investment. Capital Gains only that she looked at her business income in relation to the value of the land only, or the whole purchase amount to calculate the return of investment on this place. And there are several ways that could be evaluated, and a discussion of these issues she thinks would help all those who have a larger piece of land attached to their properties.
Jason Hartman 17:27
Okay, Christina? That’s a great question. So Adam, I’m glad you picked this one. We could talk about this for a half hour and we don’t have time to do that here. But this question will be woven through future episodes, and it’s been woven through past episodes already. But let me just answer it kind of concisely. First off, you asked, How do you evaluate a piece of raw land as an investment? You can’t because raw land is not an investment. It is a speculation. And it doesn’t mean you shouldn’t ever buy it. But it means that you can’t calculate an ROI unless it produces income. Remember my definition of an investment, investment must produce income, or it does not qualify as an investment. It is only a speculation. Now your land, I believe you developed it into a farm that turns it into an income property, and then it can be evaluated. So you can simply use our property tracker software and plug in the numbers and evaluate it as an investment in that way, meaning income versus expenses versus cost to buy it right. Those would be the basic ways to evaluate it as an investment, but as a speculation. In other words, and you alluded to that, Christina, you talked about how the city would double in size. You talked about how you could subdivide the property. Those are the speculative things, because they’re you’re you’re talking about something called the path of progress, right? Meaning that the city will grow in size, and the land hopefully goes up in value. When you talk about subdivision, you’re basically becoming a real estate developer. And certainly, you can make money subdividing the property and selling some of the parcels off or using them in different ways for income and so forth. But until something produces income, it cannot be considered an investment. Okay, it can only be considered a speculative opportunity for capital gain in the future. And those things are almost impossible to evaluate. It doesn’t mean that there isn’t potential there. It just means that you really can’t put it to a calculator. You can’t go to property tracker and say, which is a very fancy calculator. What happens if the city doubles in size? What happens if I subdivide the land, you can’t do that you can only Talk about income and expenses and cost of acquisition. And then the disposition price when it’s eventually sold, you can do those things. But you don’t know what your disposition costs will be on the potential subdivision the capital gains, or the growth in the value of a land over time. So those things are harder to evaluate. I hope that makes sense.
Adam, any thoughts on that? No, I think it’s just important, like you said that it this is kind of basically buying a personal residence, you have to look at it initially, as is this something that I can afford to live with today with the payment? And if it is, then it might be worth it? If it’s not, then it’s not worth it in that respect, because you’re just buying it hoping that it can go in the future and that I believe that violates one of the commandments. So
Jason Hartman 20:47
commandment number five, Thou shalt not gamble, right? Is that the one you’re talking about? That would be mine? Yes. Is if you haven’t planned for it. That’s one thing but it has to make sure you have to make sure it fits in your budget to begin with, because you can’t plan on it. Producing income from day one. So you have to make sure that your finances and the rest of your life are set in a way that you can afford to pay for it until the day that it does make income and you have to have a plan for it the day you buy it absolutely makes a lot of sense. Okay, Adam, good question. Christina. Thank you for the question. We’ve got a lot more listener questions, we will get to them I promise. Going to five days a week publishing episodes five days a week will really help us get to your questions, and we really appreciate you sending them in at Jason Hartman comm slash ask. Let’s get to part one. And let’s protect you listeners from investing in opportunity zones. Don’t get burned. Okay, listen to both parts of this episode. And here we go with part one.
Jason Hartman 21:51
Hey, it’s my pleasure to welcome a returning guests back to the show my friend and our fellow venture Alliance member mike Slotnick. He runs a hard money lending company. We’ve done a lot of business together over the years. And he also is I would call him an expert in deal valuation, and also running a fund and looking at syndications. And he is a walkie guy that loves looking at the math and loves looking at the numbers and loves analyzing deals and tearing them apart. I send him a lot of deals that come across my desk, so he can look at them. And you know, we got to talking recently about opportunity zones, and I think this is highly overrated. Now, I may be wrong, and you’re welcome to give me some feedback. Go to Jason Hartman comm slash ask and tell me if you think I’m out of my mind, but I don’t think I am. We’re also going to talk about some deals we looked at recently, and how really a lot of these syndicators and a lot of these fund managers are really praying On unsophisticated people, people, frankly, who are just naive and don’t know any better. And they take huge management fees. They’re making all sorts of malinvestments doing deals that are just lopsided deals. We’re going to talk about this today and protect you and help you be a better investor and especially a better real estate investor. Mike, welcome back. How are you?
Mike Zlotnik 23:24
Jason, thank you for having you back. Yeah,
Jason Hartman 23:26
it’s good to great, you know, so we got into a big chat over the last week or so, about the promoters out there promoting these opportunities zones, and we really did not dive into this pond. Now we have taken a dive into many other ponds over the years. We helped people make a lot of money in the go zone. Back in the day that goes zones where the hurricane affected areas in the Gulf Coast. I personally profited from out on my own investments, and so did a lot of our clients. There came a point when they begin overvalued because a lot of money was chasing those tax incentives. And you know, it seems like we have this going on again. But the deal today the opportunity zones, and you can be a direct investor and opportunities, own properties, or you can invest in a fund. And, you know, I see all the promoters out there promoting it, it’s a buzzword, they’re probably making a lot of money doing it. But frankly, I think these deals are mostly very overrated. And really a bit of a scam. I’ll just say it. I don’t think they’re very good. Maybe I’ll see some that make sense and look really good in the future. And we might even promote those. But what do you think, Mike?
Mike Zlotnik 24:37
I think that opportunities zones by themselves don’t present the great investment opportunity. What it is it’s a tax advantage areas where investors need to be very smart about selecting who they invest with, what type of fund they invest in. And by the way, the language opportunity zone fund can refer to a fund Working refer to individual deal. In fact, writing opportunities own fund is very complicated. So the initial sort of thoughts for most people is to run a single asset fund, you can have many investors, it’s a pooled money vehicle that raises capital from number of folks and but investment is single. So there’s two separate considerations. One is opportunities own benefits into the deal needs to stand as a quality deal and of its own with the right sponsor. So a lot of problems come from the fact that it’s a hype. It’s sort of a hot subject in many hot air sponsors taken advantage of this, and they’re creating demand. And they’re going to provide some product in the space, get capital from investors, and most folks don’t understand what they’re getting themselves into. Investment itself may be pretty bad, the sponsor can fail and the project could fail. On top of that, what happens is they have to follow us strict compliance with opportunity zone rules in order to take advantage of the tax benefits that are in the tax code. So it’s one of those to lay out lay of the land, the opportunities on funds could be a good addition to the normal investment. But if you invest in capital just to take advantage opportunities, own tax treatments, you may or may not be happy, most likely, you’ll be disappointed. Yeah, I
Jason Hartman 26:26
love how you call them hot air sponsors. These are the promoters out there promoting trying to collect your money to invest in opportunity zones, these hot air sponsors, and so you can do an opportunities own investment. Now, these are tax advantaged investments, although the tax advantage really isn’t that great. And we’re going to dissect that here. There is a little bit of an advantage for sure, but it’s not, you know, it’s not anything to write home about as the saying goes. So you can invest directly you could buy properties in these economically disadvantaged areas and have some tax advantages. You can do that directly as a direct investor, just buy a property and, you know, so forth and fix it up. And, and now, we’ve also discovered that you have to do an extensive amount of rehab and improvement to the property. So we’ll probably have the chance to talk about that. But you can also do it through a fund a new you can always do a, you know, three basic kinds of investment concepts we’re talking about, okay. In general, right. There’s a direct investment where you just buy a property. There’s a fund, where the fund buys maybe many properties, many assets. And then there’s a syndication, where it’s one deal. It’s one asset, but they’re bringing on a bunch of investors. That’s different from a fund. Mike, do you want to elaborate on that as a general concept, not necessarily playing the opportunity zones, but it does before we dive in a little more sure.
Mike Zlotnik 28:00
So funds typically, as you mentioned, as many investors many assets that’s a general concept. funds could be many investors one asset which is essentially a syndication, that’s what syndication is you have this offering memorandum disclosures but a single asset. That’s the major difference between funded syndication is they typically pull the money for many investors, and fun as many assets while the syndication is a single asset. And you can do direct property investing, however, still, you could do fractional ownership, you can be a partner in a single property.
Jason Hartman 28:29
Okay. Okay. So there’s about 8700 opportunity zones around the US. Again, these are economically disadvantaged areas. Some of these areas may come back and may show some improvement, some may never come back. You know, there are just some areas that no matter what you do, they just can’t seem to come back. So keep in mind, they don’t all turn around. Okay, some areas just sort of never really recover and they’ve been in bad shape for decades and will Very likely continue that way for many decades. About 90% of these opportunities, own funds must be invested within the opportunity zone itself. Right. Do you want to elaborate on that component?
Mike Zlotnik 29:14
Sure. So substantially all whether that that terms of potential yet to be defined? Yeah, right. But the rule of thumb is, is here’s 90% of the opportunities, own funds need to be invested within the opportunities own in whatever form shape, it’s either direct investment through a fund and so forth. So these opportunities, own funds, they’re limited in their ability to select the targets is one of the problems with opportunity zones, funds, promoters, let’s call them project sponsors to raise capital, and they need to find deals now within the opportunity zones, otherwise the fund will be out of compliance. So part of the challenge of running opportunities own funds, is that if you raise the capital, you don’t have the deals well, money’s burning a hole in the pocket, may not invest in greatness. This is
Jason Hartman 30:00
one of the big flaws of putting your money into these pooled money deals, especially when it’s about properties. In particular, see the fund that you run. Mike is not about properties, it’s about loans. And it’s easier. It’s okay for
Mike Zlotnik 30:19
Okay. All right, okay.
Jason Hartman 30:22
Yeah, but here’s the thing, you can alternate between loans and properties. And when it’s just properties in a tight inventory market, where deal flow is constructed, the fund manager will tend to overpay, just because they have to deploy the capital. Right. That’s what you were just alluding to that, sir. That’s a real dynamic, isn’t it?
Mike Zlotnik 30:44
Yeah, exactly. Depending on type of fund and depending on liquidity of the fund and the capital that’s sitting idle fund managers may be compelled to make investments that are not otherwise great. Our fund is a diversified fund. We have a broad portfolio in Greece, just enough capital so we can deploy it. Good matter opportunities own will be a little bit trickier because they start from scratch, any fun to start from scratch as this gavel is an equalization problem, where they’re going to raise capital and they got to put it to work. Have they found a good number of deals that meet the criteria of the fund, and that’s the issue. So it’s a little bit misleading. But you’re right, that the funds that raise capital don’t have the deals, they will probably make some bad decisions just because project sponsors raised money
Jason Hartman 31:30
malinvestment, because too much money is flowing and not enough deals are flowing to deploy that capital. So the capital eautiful utilization problem exists for the fun, okay. So, you know, you got to acquire the property after, you know, the end of last year 1231 2017. Of course, we’re already past that. So that’s no problem. Some of the rules are still being defined, right? Talk about the incentives, if you would, and kind of why the promoters are being successful in getting investors to buy these properties in these very disadvantaged areas, these blighted areas, how they’re getting them to invest in these funds.
Mike Zlotnik 32:10
So the drivers for folks to invest are situations where there are significant real estate or just capital gains in general from stocks. If you are a Amazon investor from the very early days, you bought it for $10. And it’s worth thousand dollars. Now, for the sake of the argument that you have a massive capital gain, you want to sell and move the money from investment that’s generating no cash flow to some cash flowing assets. So Alternatively, you want to diversify. That’s where this thing comes in. If you are real estate investors, number of them have been moving from an SM to anessa, two through 1031 exchange, kind of deferring capital gains, and they want to get out of that 1031 game in that essentially want to pay taxes but when reduced amount. So the benefits of this if you invest in an opportunity zone, as investor and you hold your money in a fund or individual assets and oppositely opportunities own for five years or more, you get 10% tax benefits, your cost basis goes by 10%. So if you had, say $100,000 in capital gains, you held it for five years, you will now have $90,000 in capital gains. And if you hold the investments for seven years, that’ll be increased by another 5%. So you will now have essentially liability of only $85,000. So it goes to 15%. So let’s 50% savings is a real savings, but you got to park the money for at least 70 years. In addition to that, that is another benefit the additional capital gains on the project. So you put a million dollars into a project and 10 years later, that million makes another million dollars, but you got to hold it for at least 10 years. That extra million dollar capital gains is tax free. So essentially, you invest in You upside, if you hold the 10 years old appreciation, additional appreciation when the acid will be tax free.
Jason Hartman 34:06
Okay, so here’s the thing, it could be not tax free, but tax deferred just by doing a 1031 exchange, and you wouldn’t be forced to invest in any specific area. You could also do an installment sale trust, and pay the game slowly if you wanted to cash out. There are other options here that don’t force you to have the tail wagging the dog so to speak. They don’t force you into malinvestment.
Mike Zlotnik 34:38
Correct. The alternative to this is to keep doing 1031 exchange indefinitely. So this is just an alternative to 1031 exchange to park some money into a fund like this. What’s most interesting there is a sunset. Essentially this date will if you sell assets and you defer capital gains taxes on this date if you haven’t sold an opportunities own fault fund Your capital gains taxes still do. And the date is December 31 2026.
Jason Hartman 35:07
Okay, so in other words, you must keep it for a certain amount of time. But you can’t keep it past that time is that you could keep it, you could absolutely keep it past that. Well, I mean, you can’t get the benefit if you keep it past the time,
Mike Zlotnik 35:20
right? You get the benefit of a text liability reduction, but you owe the taxes on the amount that you defer. So in other words, you had $100,000 off now we are approaching 2018. So there’s only seven years exosuits eight years because end of 20 2026. So you hold it for seven years. At that point, if you don’t sell you hold another year, it’s eight years well, now the tax liabilities, you win that $85,000, which you haven’t yet cashed out, but the tax is a deal. So if you actually hold the full 10 years after eight years from now on December 31 20 Six, you will have to pay the tax bill on the 5% of your defer capital gains taxes now come and do so and it’s very possible that you will have no cash, but you have to pay the bill. Right. So you have to prepare for this. Because you gotta wait for 10 years in order to realize tax free benefits of additional capital gains on that investment. Does that make sense?
Jason Hartman 36:23
Yeah, that’s okay. So I want to make a disclaimer, Mike, everybody listening, you know, I’ve said this many times before, over the last 1100 plus shows, we are not tax advisors. We are not legal advisors. Legal and tax issues are complicated. So please seek out a licensed professional for details. We’re talking about the investment side of the concept here. And of course, you have to talk about the tax and legal implications. But again, we are not qualified to fully understand complex situations or anything like that. And everybody’s sitting tuition is different. So, you know, as they say in these disclaimers, I always love to hear this one. This is for entertainment purposes only. So
Mike Zlotnik 37:08
yeah, and this is our understanding of these laws. These laws are new. And it is very possible we misunderstand some people, an IRS comes out and makes a clarification and says, well, we’re changing this little bit and that change can be material as well. Got it.
Jason Hartman 37:22
Okay, good. Go ahead. So what else should people know?
Mike Zlotnik 37:26
So that’s pretty important ramifications. The most benefit will be to those folks that have a lot to gain from any sort of actions typically, who could take full advantage of these kind of family offices with significant we’re talking about 10s of millions of dollars, very high net worth individuals, who with a lot of legal and CPA advice, who structure significant positions in these type of investments. On the right projects include take advantage of these situations, but there will be plenty of escalon small investors Participating in syndications with no control and no understanding of how this thing’s going to flow and death situation or investment may be different, while the fund manager will be running these funds and different folks will have different objectives. So thinking about just the tax benefits is a potentially disastrous type of investment because money will be stock fund manager can make decisions that will benefit some people and hurt some other folks.
Jason Hartman 38:31
Thank you so much for listening. Please be sure to subscribe so that you don’t miss any episodes. Be sure to check out the show’s specific website and our general website heart and Mediacom for appropriate disclaimers and Terms of Service. Remember that guest opinions are their own. And if you require specific legal or tax advice, or advice and any other specialized area, please consult an appropriate professional and we also very much appreciate you doing the show, please go to iTunes or Stitcher Radio or whatever platform you’re using and write a review for the show we would very much appreciate that. And be sure to make it official and subscribe so you do not miss any episodes. We look forward to seeing you on the next episode.