EP 040 - Captive Qualified Opportunity Zones & QOZ Strategy Stacking w/ Justin White

It's so important to collaborate with your tax advisor, not just on business and investing events, but personal life events. Here's one example of how the client's baby created the opportunity for us to create hundreds of thousands in additional tax savings for our client by timing expenses and qualifying the client for a new tax election - the Real Estate Professional Tax Status. Other times, we've strategically planned around marriages, divorces, job changes and family needs to create transformational current and future years' savings. Make sure you're communicating any major life events and changes in your financials and business to a QUALIFIED tax advisor! 

Wouldn't it be life-changing if you could mitigate capital gains and diversify your portfolio through real estate investing? Tune in as we host Justin White, a real estate wizard, who pulls back the curtain on the world of 1031 exchanges and qualified opportunity zones. We deep-dive into the intricacies of these investment strategies, helping you understand the tax benefits that could supercharge your profit margins. In particular we touch on captive qualified opportunity zones, and how one can access faster cash flow and more depreciation by investing into vehicles that are ready to operate immediately and offer greater depreciation. This combined with real estate professional tax status can be extremely impactful!  Whether you're a seasoned professional or just dipping your toes into real estate investment, this discussion is a goldmine of insights.

As we progress, we address the pressing question of extending the 2026 deadline and reshaping the Opportunity Zone map to better serve the communities who need it most. We touch on the impact of Fortune 500 companies on these zones, with a special mention of the Gigafactory. Not to be missed is our exploration of the role of AI in the real estate business and the importance of customer service in enhancing your investment experience. Join us and elevate your real estate journey!

Transcript

Mark Perlberg: 0:00

Welcome everybody. Thanks for listening. I'm really excited to present to you Justin White. We are going to talk about some of the projects that he works on to help real estate investors with finding opportunities, finding ways to invest their cash and also how to mitigate capital gains. Justin, can you introduce yourself in 60 seconds or less and tell us what you do as a tenial advisers?

Justin White: 0:25

I'll do my best mark. Thank you for having me on today. I'm really excited about it and I'll be real quick. So I've spent 20 years in the commercial brokerage space a long time with a big national firm Left there. Five years ago started Centennial Advisors and our main focus is on helping private clients do the best they can in investment real estate. We do a lot of 1031 exchanges. We help a lot of people diversify portfolios and over the last five years or so we've spent a lot of time in the opportunity zone space helping people realize the tax benefits of opportunity zone investing and helping also communities realize the benefits of getting opportunities on investors into their area.

Mark Perlberg: 1:06

Cool. So you. What's interesting here is you know I've talked to a lot of people about 1031s we had. We had like an hour and a half long jam session on it with David Foster a really great episode and we did another conversation on qualified opportunities zones, but I haven't yet had a chance to talk to someone who walks the client through both strategies. So what I'm wondering is how do you help a client decide between a 1031 exchange and a qualified opportunities on funds?

Justin White: 1:41

So great question and I would say most of the time we actually don't have to help them figure it out, because in our opportunity zone space a lot of people are taking capital gains from something aside from real estate. Might be the sell of a business, it might be a sell of some Air Jordans, whatever it may be. They have a big capital event that came from something outside of real estate and then they're going to use the qualified opportunity zone to get some of the tax benefits of putting that capital gain into an opportunity zone area. Now for our 1031 clients.

Justin White: 2:14

Most of those people are all those people already own real estate and what we do in that scenario is we take a look at what they have.

Justin White: 2:21

How well is that property really doing on a return from a return on equity standpoint and its ability to accumulate wealth over the next 10 years? And then we ask them and figure out where do they really want to be? Do they love this property, or maybe do they have some lifestyle changes and they want to get into something else? We combine their non-financial interests with a deep financial analysis of their property and if they can do better in a 1031 exchange, we help them do that Now, for maybe 10% of our clients, they are taking money that was in a piece of real estate and, instead of doing a 1031 exchange, using the opportunity zone benefits and redeploying proceeds from the sale of a piece of real estate into an opportunity zone. And in those rare cases, it really depends on how much basis they have and what their let's call it long term strategy for whether they're going to sell it at some point in their lifetime or if they plan on holding it until it passes to future generations.

Mark Perlberg: 3:27

I think that I've been thinking about this and I think that there's some really cool stuff we can do with QoZ when we combine it with some other opportunities. So we have a client with real estate professional tax status and they have a non real estate capital gain. Right, you're going to not only do you defer the taxes until 2026, but now it's going to invest in a QoZ and maybe, if you could do the right grouping election, you might be able to group in. They're going to run in a car. Eventually, they're going to do a cost segregation study when that property is up and running and the cost segregation study will create a tax loss. So you go from a position where you go from paying taxes to actually invest in something that's going to give you a tax loss in addition to all the other benefits that you're going to see long term from the QoZ, which is pretty cool.

Justin White: 4:21

We actually have a client who is that exact scenario as well. Definitely, real estate professional makes most of their money in real estate, had the capital gain and now, through getting additional basis by financing the Opportunity Zone Purchase, they're actually going to use a bonus depreciation asset that's going to get 80% year one and they're going to do the same thing, create a tax loss that they'll be able to utilize really for a couple years from effectively utilizing the Opportunity Zones and all the benefits that they get.

Mark Perlberg: 4:56

Yeah, another cool thing a lot of people don't think about here is that after 10 years on your exit, you pay $0 capital gains on any capital gains generated from your investment. Now if you can't use that deduction from the cost let's say you don't have rep status, you have the suspended losses and you continue to invest elsewhere and you still have an accumulation of losses from your investment in this QoZ. When you eventually exit out, Not only do you pay no capital gains, but you may actually be able to free up these losses now to offset other sources of income. Really nice.

Justin White: 5:32

It's a really interesting thing. I've found that the non real estate people who look at all of the tax benefits of Opportunity Zones are blown away with all the benefits that they get the deferral till 26, the no capital gains if they hold it 10 years, if they finance it and take a bunch of depreciation no depreciation recapture. All that stuff makes perfect sense to them and they love it. It's interesting that oftentimes our real estate clients they don't appreciate the tax benefits of the Opportunity Zone as much because they're so concerned about it as just a real estate deal. Sometimes the real estate client is slower to take advantage because they're purely looking at it as a real estate deal and they don't see all of the tax benefits that come with it.

Mark Perlberg: 6:27

We've had this with clients because our demographic is mostly younger folks in their 30s. We have other people in their 50s and 60s but they want to have direct control of their assets. They're a little bit turned off by QoZ. Sometimes in situations where they have real estate capital gains, obviously with stock capital gains, the, the QoZ might sound more appealing. One of the ideas I was thinking about is let's say, you're doing a large 1031 here, right, and you have some taxable boot because maybe you want to have some, maybe you just you just don't have enough basis in the replacement property, or maybe you want to use your cash something out, whatever it is. Now I'm thinking to myself perhaps you could use a QoZ to offset the taxable boot from a qualified Opportunity zone fund, which would be a nice combination of strategies. Have you ever seen anybody think about that? Or maybe this is just my mind wandering in all different directions.

Justin White: 7:29

No, I think that the combining of strategies is when people are really taking it to the next level, because there are. You can combine strategies and I'll give you another combined strategy that we had. We had a client who had a significant capital gain event. They bought the first opportunity zone property cash because they brought it, bought it certificate of occupancy, they refied 60% of it, then redeployed that 60% in another opportunity zone property, ended up acquiring basically four opportunities zone properties in a step-by-step purchase Scenario like I just described, and then, with some other available fresh cash, went out and bought a C store last year to get the hundred percent depreciation in 2022 to create a huge, huge and loss, with all of the depreciation to offset against their original capital gain.

Mark Perlberg: 8:35

Very beautiful. Now, one of the things I'm also thinking about here is because it's really nice that you have for this as a real estate Capital gains strategy is wonderful that you not you not only are you deferring the gain, you're getting access to, to a lot of depreciation from a cost that will be performed on the qualified opportunity zone fund and you can take your basis and invest it elsewhere to get more depreciation offset future cap gains. But with stock and other forms of non real estate capital gains, the, it might be a little bit trickier here to generate losses offset that capital gain because it's non real estate and 2026 is not that far away. It's great that we're deferring it. Where are your thoughts on tax planning for when your capital gains are going to be recognized in 2026? And Also another thing I'm thinking about when we're thinking about in the future here, past 2026, what do you think's gonna happen in our legislative environment? Do you think they're just gonna let QoZ's expire or what do you think we're gonna see with QoZ's in the next couple of years?

Justin White: 9:49

So I'm probably optimistic because I really like qualified opportunity zones and I've seen what it's done for people. But the thing that I always keep in mind is that I think the opportunity zone idea was the only Bipartisan thing that passed during the Trump administration. So while everybody was so partisan, both sides of the aisle were able to see the benefits that opportunity zones would would bring, and they certainly have in some of the areas that we have had Our clients invest the. The number of new buildings and new businesses coming to, coming to that census tract there's really been off the charts and been phenomenal. So the idea that Providing some tax benefit to get people to invest in certain census tracts has been fantastic.

Justin White: 10:40

I believe that there is discussion now about extending 2026 into 2028, and the main reason being that they're talking about a two-year extension is that once Opportunity zones came out as a part of the tax Cuts and jobs act in late 2017 is it took the IRS about two years to provide guidance on some of the things that people were doing in OZ's, and Once that guidance came out in 2020, the number of dollars that got into opportunities on significantly increased, and so the talk is extending it two years to have a kind of that same window that they had originally intended when it passed in late 2017. So I think we might see it get extended. I actually think that we might continue to see it get extended because of the positive impact that it's having.

Mark Perlberg: 11:35

Yeah. So what I would think and this is I'm not in, I'm not on Capitol Hill, but what I would think in hope, is to see a qualified opportunity zones exist in perpetuity. And you know, what would be really nice is if you know right now, yeah, wait till 2026 for these Qo Z's have their for the gain recognized in 26, and we used to have a partial step-up in basis and and no, perhaps when they create legislation that's meant to last long term, hopefully that we can see a little bit more of a delay in when we recognize the gain, maybe bring back the partial step up and basis. That would be really fun and a great opportunity for our clients.

Justin White: 12:25

Yeah, I think that a lot of the things that they're doing in OZ let's call it legislation or discussion of legislation right now is to continue to get people to invest in it.

Justin White: 12:37

There certainly is some thought that they will redraw the areas or reselect the census tracks that fall into opportunity zones, and if the legislation is really designed to make a positive impact on the areas that need it most, they probably do need to do that.

Justin White: 12:57

The current OZ map has a lot of places that are pretty darn good. Our clients have invested in places like the Reno Sparks industrial complex, which is where the Gigafactory is, and all kinds of other big Fortune 500 companies have facilities. Well, that's in an opportunity zone. Other places, like areas right around universities we have a client who purchased an OZ property a mile from Purdue, which is probably less than a quarter of a mile from Purdue University's technology campus. So there's a lot of places that have fallen into opportunity zones right now that are amazing places to invest just good quality locations where you also get the opportunity zone benefit. At some point they're probably going to make some changes to get the correct areas in there, but there are some places right now that are kind of in the whoops how that one get on the list sort of opportunities.

Mark Perlberg: 14:04

Yeah, you know, I've been to some areas and opportunity zones and seen some buildings and opportunity zones that were in really nice neighborhoods and really cool areas, and I've heard people who were just so quick to jump to a conclusion of, oh, we don't want to invest in those types of areas, you don't want to take the risk up there. And I think that we should really question our assumptions and talk to the organizers and really look at what's actually going on and what you're actually going to be investing in and what are the numbers actually looking like.

Justin White: 14:39

Yeah, absolutely. I think the initial thing with opportunity zones that why more people didn't invest in them was one. They thought that it was all you know. Let's call it tough areas Number one. Number two as we mentioned earlier, they were going to, most likely because of the rules, have to invest with a bunch of other people or invest with somebody who had expertise building a property, and then they thought that it was going to be really intense management of the assets and for the first couple of years I think that was the problem in opportunity zones.

Justin White: 15:16

But as we dug in on it and looked at it and tried to figure out, okay, how can people take advantage of this opportunity that's been made available to them? We realized there are a lot of areas that are good to really good that fall into the opportunity zone designation. Number two we figured out a way within the IRS guidelines that you could invest just yourself and not have to invest with a ton of people. We also figured out that, within the IRS guidelines, that an investor could acquire a property the day before certificate of occupancy. So the best example I can give you is a brand new 711 gas station and convenience store Developer goes out, finds a site gets 711 committed to the lease. Developer builds everything up until the day before certificate of occupancy. Opportunity zone investor can come in, buy that property, get all of the benefit for the construction because of the way the IRS defines placed in service and the IRS has gone to court and argued what placed in service means you acquire it the day before certificate of occupancy.

Justin White: 16:31

Our opportunity zone client goes, gets the certificate of occupancy and now they have a great corporate tenant.

Justin White: 16:40

We adjust the leases because a triple net lease is not allowed in the opportunity zone space, so we adjust the lease to be double net or single net with the tenant and now our clients are able to acquire in their own opportunities on fund a long term corporate backed tenant with some management responsibility, but not a ton of management responsibility. And that was the real. I think the big problem is that people couldn't find opportunities like that. That would be easy because I would imagine that a lot of your clients or at least a good portion of your clients their capital gain event doesn't come from a real estate transaction. It comes from, you know, the sale of a business or something that they've created you know elsewhere outside of real estate and they don't want to get into a super management intensive real estate situation because they don't know it. We've kind of figured out a way where they can invest their capital in these areas that are improving, get the opportunities on benefits without some of the management intensive headaches that come with some of the real estate investing.

Mark Perlberg: 17:46

I think that there's an additional opportunity here. So if we're going to a convenience store in a gas station, then this could also potentially be a C store, where the whole building would qualify for well 80% of that building. We could potentially write off a bonus appreciation on top of that right.

Justin White: 18:05

Exactly, and so last year was even better because you could do 100%.

Mark Perlberg: 18:11

Yeah. And so that's amazing If you got to do that for a client, say, hey, instead of paying capital gains, we're going to leverage this into another asset. That's going to let you write off what like two and a half times your contribution, or what three, I don't know. Even I can't imagine what the multiplier is, but it's got to be at least two and a half times your contribution. Gets turned into a tax deduction in year one, right?

Justin White: 18:38

They're fantastic. And so of our opportunity zone transactions that we've done, at least 50% have been in some form of property with some form of Mark's depreciation to it, whether it was a car wash, collision center, gas station, convenience store. So we've done a significant portion of that. You already mentioned cost segregation. Unfortunately, in our traditional real estate business most of our clients aren't using cost segregation yet. They're still scared. But yes, on our other stuff on the industrial buildings that we've done, on the fast food that we've done our clients are immediately doing a cost segregation study to take advantage of any additional depreciation that they can get and take on those opportunities on acquisitions.

Mark Perlberg: 19:37

Wonderful, so and so what you introduced me to because, in my mind, you typically would invest if you, unless you had something in the QoZ that you just came across, which is very rare for people with capital gains, but most people will invest into a QoZ fund and the fund will pull people together to invest in a brand new project in real estate. But what you introduced me to is a concept of a captive qualified opportunity zone fund, right? So where you can? I believe you said we could be the sole investor in a project in this circumstance, and we're not. We don't have to split out our equity with all these other LPs, right?

Justin White: 20:23

Correct. So all of the opportunities on acquisitions that we've done have been what we call a captive opportunities zone fund, where you're not investing with a number of other people not known to you. It is you know your capital gain. If it's a partnership, it's just the partner's capital gain going into their opportunities zone fund. So that's actually number one where when we lay out the idea, people go, oh yeah, you're right, we can do that. The second one is the acquisition of the property right before certificate of occupancy and being able to get the credit for all of the development because of the way the IRS looks at placed in service state. That's the one that surprises most people is that they don't have to put that first shovel into the ground and do a bunch of construction or development that they have no experience in.

Justin White: 21:25

They can wait and acquire the property right before it's grand opening, basically, Right.

Mark Perlberg: 21:33

So you see less of a lag between the time that they make their contribution and the time that they get to get the deductions from the depreciation and the cost sag and also the cash flow. So there are some projects that are already almost ready to be up and running. They're ready to put the cash in and press go and see the economic benefits a lot sooner.

Justin White: 21:54

Absolutely, and that's one of the things that our clients really like about it is that they can. In some cases the lease goes into effect on certificate of occupancy that's two or three days after we've closed escrow and they get their income check right away. They get to realize the benefits of the depreciation and all those things virtually immediately, versus having to wait for a project to get done and depending on the areas it might be, let's call it six months to a year shoot. In California it might be two years or two and a half before cash flow can get generated on a project once it gets started.

Mark Perlberg: 22:37

Very cool. Now, another thing I'm wondering here now is tell me about when you're talking to your clients and investors. How do you quantify the profitability and the economic benefits of these QOZs?

Justin White: 23:00

So the neat part for us is that we first look at them just as a real estate deal and it starts with location. So how great is this location? If we like the location, well, then we're going to evaluate the tenant and the lease and the quality of the tenant, the quality of the lease, how protective the lease is for our clients, because most of the time our investors in these things are looking to place money that they've made and preserve it. They're not necessarily trying to hit the next grand slam. They've made a good chunk of money, they want it to produce and they want it to be safe and secure. So we evaluated first as a real estate deal. If it looks good as a real estate deal, then we start to look at okay, what type of property is it? Is it going to qualify for just cost segregation or is there going to be some bonus depreciation? Okay, if we finance it, how much financing can we get? Because that's really in our minds.

Justin White: 24:06

The key component for getting the to utilize an opportunity zone forgiveness of depreciation recapture is creating additional basis by being able to take your 10 million in capital gain and go out and acquire 20 or 25 million of high quality real estate. Now you've created 15 million in additional basis that you can depreciate over those 10 years. That's going to get forgiven as well. So if we take our 10 million, we buy 25, 10 years from now it's worth 35 or 40 or whatever it is. We've got 10 to 15 million there that you're not going to pay no tax on, and you used let's call it 10 million in depreciation, where you pay no depreciation recapture.

Justin White: 24:59

Yeah, beautiful it's a home run in addition to just whatever the cash flow was for the, you know, relative to the risk of the tenant.

Mark Perlberg: 25:09

Not only that, but you also get your principal back and, unlike with the 1031, where your principal has to roll over, you can do whatever you want with your principal. Perhaps you invest in other assets that'll generate tax savings or cash flow as well.

Justin White: 25:25

Yeah, and our clients look at it, you know. The deferral is also another nice point and, as we're getting closer, it's obviously not as valuable as it was had somebody done it in 2020. But still, you're deferring your tax on the capital gain that you made and you're basically using what you owe the government to make you money. So that one is, like I said, as we're getting closer it's not as valuable, but it's still a nice component of the Opportunity Zone program and benefit to the investor.

Mark Perlberg: 26:00

So what do you think people are going to start saying in 2025? If we don't see any extensions here and the you know, let's say we at that point we're only going to get a one year deferral and there's going to be some potential tax liabilities at that point. And what do you think clients are going to be doing to mitigate that initial? Now you still see the benefits that if you hold it for 10 years, there's no more capital gains on the exit. But what do you think clients are going to start strategizing to navigate the potential capital gains that'll be taking place in 2026? Besides, were you with a guy like me?

Justin White: 26:40

Well, exactly, and I think that that's why, right now, like we have some clients that are like, okay, well, I've got, you know, basically 24 months based on when my tax year is and when I had the gain to invest it, and we're like, yeah, you can sit and wait, but you know, as we are going to get closer, the deferral is not going to be as valuable, the bonus depreciation is not going to be as valuable in the year of your capital gain event, so I think it's not going to be quite as valuable. Just, the opportunity zone Now it still will be. You mentioned it. You're going to get no capital gain if you hold it 10 years and you get no depreciation recapture, and those two things are huge in what makes an opportunity zone investment, a really good real estate investment.

Justin White: 27:37

But I think that right now, doing it now, the one thing that people are going to be able to do is that they are buying real estate relative at a discount right?

Justin White: 27:48

You know, 18 months ago we had interest rates at three, you know even high twos for a really high quality project into the low threes and now we're in the six to seven range. That changes cap rates and that's brought cap rates up and prices down, and so if somebody does something in the more near term, not only are they going to get more bonus depreciation, they're going to get the longer deferral, they're going to get more time to work with somebody like yourself to strategize for that event in 26. But they're also going to get a deal. I mean, we've done a number of 7-Eleven's where it's the exact same tenant, it's relatively a similar location and demographics, opportunities on deals that we were doing at four and a quarter a little over a year ago, that now we're getting that same product at the five and a half range, and so there has been, you know, a discount on these things that if somebody does something now, they're also getting that benefit.

Mark Perlberg: 28:56

What do you see as a typical capital contribution, a minimum requirement of commitment and what most people are doing to get involved in the type of vehicles that you're creating with your clients.

Justin White: 29:12

So we've worked with people with as little as $500,000. Although what I would say is it's probably for a high quality tenant with a good long term lease and that's where we find I think let's call it the safest or the lowest risk sort of opportunities. It probably takes somebody a million and a half to two million to get high quality stuff. Now that's on the low end. We have clients that have 20 to 30 million in gain that we are sometimes putting into multiple properties and actually with most of our clients that have let's call it more than two or three million in gain, we are doing more than one transaction. That because it allows us to build up the debt that they will ultimately use for the additional basis and depreciation to really maximize the benefit of opportunity zone. But on a one property basis. One and a half to two million dollars gets somebody a good location, high quality tenant, taking it all the way up to, like I said, in the 30 to 40 million dollars. But those are usually spread across multiple properties.

Mark Perlberg: 30:32

Very cool. So I, because I'm out of the office, I'm low on battery, so this is why some I have some questions to ask you as we wrap this up. One I want to know are you and how are you using AI in your business?

Justin White: 30:52

You know it's an interesting question we're using a little bit.

Justin White: 30:55

I'd say our group is definitely intrigued by it and trying to figure out how we can help clients and how it can be a value to us. I would say, though, one of the things that I think makes us different is that we are really customer servicing kind of customer focus and driven, and AI, like you, can never take away the human touch and somebody really understanding what the client wants to accomplish. Ai is never going to do exactly what we can do when we put our eyes on a property in a place like Rawlings, wyoming for somebody and those sort of things. So I think there is a space where AI can be valuable, and certainly in some of the analysis and some of the things we do behind the scenes, but I think that what makes always that service provider that we always really like whether it's a commercial real estate broker, a doctor or their or your tax advisor is somebody who you know is going to help you and make you feel like you're the most important thing, and I'm not sure AI can do that.

Mark Perlberg: 31:55

Yet what is? Where are some things that you do outside of helping clients and at your current position, when are some things you do for fun?

Justin White: 32:08

So I've got seven kids. My oldest is heading off to college this year, so we're really excited about that. But most of what I do when I'm not at work is right now shuttling people to a variety of different sports and after school activities and enjoying family time, For example. You can see the background that I've got. Today we're in Jackson, Wyoming. We spent all day in Yellowstone yesterday looking for animals and all that stuff. It was really awesome.

Mark Perlberg: 32:36

That is a really beautiful place that I was there once Awesome spot.

Justin White: 32:40

Yeah.

Mark Perlberg: 32:41

And another thing I want to know is let's say, we're interested in learning more about what we do and how we can invest in some of your projects. How do we contact you?

Justin White: 32:51

So you know you can contact. We're online at CentennialAdvisorscom. We do spell advisors with an E, which trips people up a little bit sometimes. My email is Justinwhite. At CentennialAdvisorscom. You can also reach out to me direct 714-231-2537.

Justin White: 33:14

I grew up in Southern California but we do business across the country and, yeah, I would say that the first thing if somebody's interested or has questions is give us a call. We're happy to help you figure out if it's the right thing to do. We're also, if it sounds like the right thing to do, we're happy to get on a call with Mark and who he's got on his team. We're happy to get involved with whoever whatever real estate attorneys or tax attorneys people have on their team.

Justin White: 33:42

What I found in this opportunity zone space is that people get intrigued by it and then they want to run it by all of their team and so far, in all these transactions we've done, you figure each client has two to four people that they want to get the sign off on. It takes a little bit of time. It takes a lot of questions. What I would say is, a lot of times that people's you know, tax advisor and attorneys are always looking out for them, so they ask us a lot of tough questions, but in the end everybody's been like yeah, I think we can do it. So it starts with just getting you educated and we're happy to do that.

Mark Perlberg: 34:18

Fantastic. All right, I'm so glad we survived this conversation before my battery ran out. Justin, thank you so much for your time. I hope you guys all enjoyed the conversation. We had Subscribe for more and if you, you or anyone you know may be interested in our services or joining our team and also receiving consultation. If you are a CPA, especially after this conversation, I have a feeling some of your casual listeners dropped off for the CPAs are soliciting. We are doing consulting for other tax advisors as well. Email info at markperlbergcpacom and have a great day.