Opportunity Zone for Brokerage Capital Gains

[BryanMD]

I recently fired my financial advisor and am left with a taxable brokerage with about 30 different funds most of which have fairly high expense ratios. I really want to simplify all my holdings to a 3-4 fund portfolio.

I have about $130k in unrealized gains in that account. My desired allocation also calls for me to put about that much money into real estate funds to rebalance. Would it be smart to sell that entire taxable account and invest those gains in an Opportunity Zone Fund? Then I would just buy back the funds I want in order to simplify my holdings.

I do have the cash available to fund that opportunity zone, so I think I would essentially be funding an opportunity zone and getting a step up in basis on my taxable account with some tax benefits. I realize I am on a bit of a time crunch here to maximize tax benefits with the end of the year being 5 years out from the 2026 deadline to get the 10% deduction.

Is there a flaw in my logic/plan?

[Lithium]

Have you ever invested in RE funds? Are you practiced in doing due diligence? I think trying to get all this done before the end of the year with the holidays looming is the fly in the ointment here.

[BryanMD]

There is an opportunity fund I’ve looked at for a while now with the same company that I have 2 equity funds with already. That’s probably the fund I would use. I had already been considering investing in this fund for the full 10 years with set aside cash, but then realized I should look into using capital gains potentially.

I’ve been trying to run my own calculations and if I understand the benefits correctly it looks like the 10% increase in basis in 2026 would only save me $4k off of a $37k tax bill. ($134k in capitol gains now at the highest tax bracket with 7.65% state tax)

That said, the funds I’d be replacing are all DFA funds with .40 ERs. Over 30 years of fees on those “legacy holdings” I’d almost break even if I just switched to VTI now.

[Lithium]

The main tax benefit of these funds isn't the $4k decrease in the CG tax, but the fact that any gains after that are completely tax free as long as you hold the fund for at least ten years. But the $4k decrease and the tax deferral would be additional benefits that expire after this year.

[BryanMD]

Am I correct in thinking that the money I invest into an Opportunity Zone isn’t required to be money from the sale of a property or security? It could also just be earned income I invest that then becomes tax free gains after 10 years?

[ChowYunPhat]

Am I correct in thinking that the money I invest into an Opportunity Zone isn’t required to be money from the sale of a property or security? It could also just be earned income I invest that then becomes tax free gains after 10 years?

Needs to be taxable capital gains as I understand them. There are also some requirements around timing including EOY 2021 and within a certain duration from the taxable event. Check with your CPA before investing to ensure you are getting the appropriate treatment.

[ChowYunPhat]

I have about $130k in unrealized gains in that account. My desired allocation also calls for me to put about that much money into real estate funds to rebalance. Would it be smart to sell that entire taxable account and invest those gains in an Opportunity Zone Fund? Then I would just buy back the funds I want in order to simplify my holdings.

I do have the cash available to fund that opportunity zone, so I think I would essentially be funding an opportunity zone and getting a step up in basis on my taxable account with some tax benefits. I realize I am on a bit of a time crunch here to maximize tax benefits with the end of the year being 5 years out from the 2026 deadline to get the 10% deduction.

Is there a flaw in my logic/plan?

Hey there BryanMD. I like the way you are looking at this. There may be some other approaches especially if the motivation is a portfolio rebalance. $130K if capital gains is no joke in a tax year. It sounds like you understand the QOZ benefits which is a good starting point.

The QOZ funds are very speculative. You are investing in new build properties in historically under or poorly-developed areas in US cities, while presumably the gov't tax incentives give these areas a fighting chance to succeed. These are also long term investments with no short term cash or liquidity options and your best capital gains treatment comes when you hold for 10 years I believe. Contrast this with other private RE funds that both throw off cash and provide annual redemption options. If you are all in on the fund manager and private RE funds, QOZ is a good option but keep in mind the additional risk you're taking.

For rebalancing, also keep in mind that future income can be used to rebalance into RE. With higher initial investment minimums on some of the private RE funds this might mean you are carrying more cash than you'd like as you save, but could allow you to move into a lower risk RE fund as well.

You might consider a hybrid approach where you take some capital gains in order to get up to the minimum needed for a QOZ or other RE fund, and then save your way to rebalancing in future year(s). No need to take excess capital gains if you don't have to. Best of luck to you.