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Opportunity Zones: Aligning Public and Private Capital

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Opportunity Zones: Aligning Public and Private Capital

At the end of 2017, a potential $6.1 trillion in unrealized capital gains was available for reinvestment.

Throughout the U.S., unrealized capital gains have significant tax implications with enormous potential. Unrealized capital gains occur when the value of an asset has gone up on paper, but has not yet been sold for a profit. Taxes are triggered once the asset has been sold.

Investors can offset or defer these taxes in a few ways, including one new strategy: investing in opportunity zones.

Today’s infographic from Bedford Funds explains what opportunity zone funds are, their core benefits, and their potential impact across the country.

What is an Opportunity Zone?

Opportunity zones are U.S. Census tracts whose citizens experience economic distress.

Originating in the 2017 Tax Cuts and Jobs Act, they offer the potential to connect long-term capital with low-income communities across the country to drive return and impact.

How are opportunity zones chosen? The initial base is low-income census tracts, which have:

  • Poverty rates of at least 20%; or
  • Median family incomes lower than 80% of the surrounding area

The state’s governor or chief executive then nominates up to 25% of these areas as opportunity zones. Nationwide, a total of 8,700 opportunity zones exist, and 7.9 million of the areas’ residents live in poverty.

Overall, 35 million people live in these opportunity zones. There are a number of disparities between opportunity zones and notional averages across key variables:

Poverty RateMedian Family IncomeEducation*
Opportunity Zones27.1%$47,31618.1%
National Average14.1%$73,96531.5%

*Adult with Bachelor’s degree or higher

It’s evident these cities could benefit from increased investment.

What is an Opportunity Zone Fund?

An opportunity zone fund (OZF) is an investment vehicle that provides tax benefits for private capital to help revitalize economically distressed communities. Both operating businesses and real estate are eligible for investment.

Many investor types may take advantage of opportunity zone funds:

  • Corporations– Also includes partnerships
  • Accredited investors– Defined as high net worth individuals, brokers, and trusts
  • Nonresident foreign investors– Only on capital gains earned in the U.S.
  • Retail investors– Through funds that have lower minimums, though options are more limited

In addition to their wide eligibility, OZFs have a number of potential benefits.

Benefits

Tax breaks on capital gains can be organized into three tiers:

  • Initial Tax Deferral– Once the previously-earned capital gains are channeled into a qualifying OZF, federal tax is deferred until December 31, 2026 or the date the investment is sold— whichever comes sooner
  • Step-Up In Basis10% of the original capital gains will be excluded from federal taxes if an investment is held for five years
  • Capital Gains Tax Exclusion– Federal tax on capital gains earned within the OZF is 100% eliminated if an investment is held for 10 years

All things being equal, OZFs realize after-tax outcomes that are over 40% higher than a standard portfolio investment. For example, the potential after-tax value of a $100 investment after a 10-year holding period would be as follows.

Initial InvestmentNet after-tax value
OZF$100$175.30
Standard portfolio investment$76.20 ($100- 23.8% capital gains tax)$132.36

*Note: assumes long-term federal capital gains tax rate of 23.8%, no state income tax, and annual appreciation of 7% for both the OZF and alternative investment.

While it takes a few years to realize these tax benefits, OZFs have long-term horizons to encourage sustained investment with a lasting impact. The result is the potential for sustainable and equitable wealth creation.

Future Impact

Although real estate investments have captured significant attention, recent regulation has clarified that operating businesses are also eligible OZF investments.

By investing in businesses, OZFs can have a direct impact on economic growth and job creation.

Ultimately, OZFs have the potential to catalyze collective impact through their scalable operating company and real estate investments. Working directly with community leaders, OZFs can help drive long-term rejuvenation from within, versus gentrification from outside forces.

Opportunity zone funds are projected to raise $44 billion in capital designed specifically to invest in this future growth.

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Investor Education

The Top 5 Reasons Clients Fire a Financial Advisor

Firing an advisor is often driven by more than cost and performance factors. Here are the top reasons clients ‘break up’ with their advisors.

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The following content is sponsored by Morningstar
This circle graphic shows the top reasons for firing a financial advisor.

The Top 5 Reasons Clients Fire a Financial Advisor

What drives investors to fire a financial advisor?

From saving for a down payment to planning for retirement, clients turn to advisors to guide them through life’s complex financial decisions. However, many of the key reasons for firing a financial advisor stem from emotional factors, and go beyond purely financial motivations.

We partnered with Morningstar to show the top reasons clients fire an advisor to provide insight on what’s driving investor behavior.

What Drives Firing Decisions?

Here are the top reasons clients terminated their advisor, based on a survey of 184 respondents:

Reason for Firing% of Respondents
Citing This Reason
Type of Motivation
Quality of financial advice
and services
32%Emotion-based reason
Quality of relationship21%Emotion-based reason
Cost of services17%Financial-based reason
Return performance11%Financial-based reason
Comfort handling financial
issues on their own
10%Emotion-based reason

Numbers may not total 100 due to rounding. Respondents could select more than one answer.

While firing an advisor is rare, many of the primary drivers behind firing decisions are also emotionally driven.

Often, advisors were fired due to the quality of the relationship. In many cases, this was due to an advisor not dedicating enough time to fully grasp their personal financial goals. Additionally, wealthier, and more financially literate clients are more likely to fire their advisors—highlighting the importance of understanding the client. 

Key Takeaways

Given these driving factors, here are five ways that advisors can build a lasting relationship through recognizing their clients’ emotional needs:

  • Understand your clients’ deeper goals
  • Reach out proactively
  • Act as a financial coach
  • Keep clients updated
  • Conduct goal-setting exercises on a regular basis

By communicating their value and setting expectations early, advisors can help prevent setbacks in their practice by adeptly recognizing the emotional motivators of their clients.

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Curious about what drives investors to hire a financial advisor? Discover the top 5 reasons here.

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