City in opportunity zone

Investors experienced a tumultuous ride in the stock market in 2020. On February 19, 2020, the S&P 500 index jumped to a record high and closed at 3,386.15. By March 23, 2020, the S&P 500 index had lost 34% of its value closing at a low of 2,237.40 due to the onset of COVID-19. While the stock market has largely rebounded since then, multiple indicators signal a market correction could be on the horizon. One key factor is the recent passage of President Biden’s $1.9 trillion COVID-19 relief bill. Many economists and policymakers are warning about the potential for the relief bill to increase inflation and derail the economic recovery. It is impossible to time the market and investors learned an important lesson in 2020: stock market crashes and corrections are unpredictable.

Create a diversification strategy

Investors can take steps to protect against these stock market uncertainties by employing a diversification strategy that involves investing in non-correlated assets. A non-correlated asset does not move in the same direction as the overall stock market, and therefore, can help to preserve capital in periods of decline in the stock market. Under this strategy, investors can reduce the overall risk in their investment portfolio and even boost overall returns by allocating their investments across varying asset classes that are not correlated to the market. Investors have commonly used real estate to achieve diversification because real estate has a relatively low correlation to the stock market and is less susceptible to macroeconomic influences and sporadic swings in the stock market.

Benefits of investing in opportunity zones

However, savvy investors can elevate this strategy and achieve both diversification and significant tax savings by investing in real estate located in opportunity zones. This tax-efficient strategy provides broader asset allocation to diversify portfolio holdings while providing significant financial benefits.

Opportunity zone tax benefits include:

  1. A deferral of tax on capital gains reinvested into qualified opportunity funds until December 31, 2026,
  2. A reduction of 10% of the gain if invested by December 31, 2021,
  3. And if the investment in the qualifying fund is held for at least 10 years, the permanent elimination of capital gains with no recapture of depreciation on the opportunity zone investment.

For more information about the financial benefits of the opportunity zones program, see our article here.

Adding real estate to your portfolio

With uncertainties looming in the stock market, now is the time to consider adding non-correlated assets, such as real estate, to your portfolio. Empirical studies show that allocating 10% to 20% of a portfolio to uncorrelated alternative investments, such as real estate, reduces portfolio risk and volatility. A popular portfolio allocation for long-term returns is the 50/30/20 equity/fixed income/real estate and alternatives model to achieve higher risk-adjusted returns. Why not achieve diversification while reaping significant tax benefits of the opportunity zones program? Investors can utilize the strategy described above by proactively harvesting gains from the stock market and redeploying their capital gain into opportunity zone investments to achieve the best of both worlds.

For more information on this topic or to learn how Baker Tilly specialists can help, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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Tracey Nguyen
Principal, JD, MBA
Michael F. Fitzpatrick
Partner, CPA
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