Ep 158: What is an Opportunity Zone & How Investors can Use Them for Tax Advantages with Ashley Tison

If you're In California, it's 150% year one on your solar investment. Then you get a residual off of that as well and it's, it's quite frankly, mind blowing.

Welcome to the Next Level Income show where it's our goal to take your income, your investments and your life to the next level. I'm your host, Chris Larson. If you haven't yet, get a copy of our book for free at our website, nextlevelincome.com. that's www.nextlevelincome.com. just click on the book link and I'll even send you a copy if you put your address in.

On today's show, we have Ashley Tissen. Ashley Tyson is the CEO and founder of OZ Pros. Ashley is the founder of OZ Pros, the leading opportunity zone consultancy. As a leading consultant and attorney on opportunity zones, tax advantage structures and investing strategies, Ashley has advised over 500 commercial property investors, family offices, investment advisors and high net worth individuals on how to best maximize their tax savings in real estate investments, how to maximize the positive community impact of their projects, selecting an optimal investment strategy and properly navigating the applicable regulations. Ashley is an engaging, enthusiastic speaker which you're going to see as we discuss the opportunity zones and how you can use it to positively affect your investment strategy. Ashley, welcome to the show.

Thanks Chris. It's a pleasure to be here. Fantastic to be on board.

Yeah, I mean, shoot, man, we're right down the road from each other. We should have, should have met up in person. We could have, I was just gonna.

Say, right, I could have been sitting there in your studio. I probably would have had to be in your lap and that would have been uncomfortable for you because I'm like 6, 8, 2, 45 that. Well, I'm actually down to like right around 240 now.

You're a big boy, man. No, we would have done it, we would have done it in our downtown studio and you would have your own seat. I can, I can assure you that. So yeah, yeah, I would, I would have had a favorable camera angle for both of us as well. So we could have, we could have done that. That's absolutely. Listen, I'd love for you to share a little bit about your background. We're going to talk about some, some really cool stuff today. Topic on opportunity zones which really came in, you know, came into conscious here, you know, when they were introduced a few years back. But you know, they've, they kind of, kind of fell, you know, felt quiet for a while. But now that they've established themselves. I think there's some really interesting stuff. So before we do that, talk a little bit about your background for the audience here, Ashley.

So I like to call myself a reformed attorney. I, I try to practice as little as possible because I like getting in the game. And so I started out as a big firm lawyer. I went in house with a commercial real estate developer, slash tenant and common syndicator. And so we bought a bunch of shipping centers, we ticked them out to 1031 investors, we raised a couple opportun funds and. And then I decided that commercial real estate wasn't risky enough. So I went to be general counsel for a golf course developer. And we had a, we actually had a project, it was an old Blue Ridge Country Club right outside of Asheville and bought that golf course in April of 2007. And so let me tell you how that plane crashed into the side of the mountain that we owned. Right. And so I went back to practicing law, built up an M and A firm. And while I did it, we started doing M and A transactions for Main Street America. And we built a software system and a process for how we could walk people through how to understand a fairly significant sophisticated transaction and bring Wall street level documents to the transaction, but to do it on a flat fee. And so I ended up selling that firm in that process to another lawyer so that I could help entrepreneurs more money in their pocket in the form of tax savings. I was at a CLE in 2018 and I heard about Opportunity Zones and I was like, holy cow, that sounds like 1031, which I had been involved in in private equity, which I'd also been involved in, got married and the guy afterwards is like, yeah, I had this beautiful baby named Opportunity Zones. And so we popped up a website and became kind of go to people over on the front, you know, on the front. And there weren't a whole lot of people that had, you know, the level of kind of diverse. So I thought my diverse background was crazy. It's like how am I going to, am I going to parlay this? And it was perfect because we had syndicated stuff through a broker dealer network and we had, you know, we had done M and A work with private equity. And so merging of those 2 of tax incentives with operating businesses is exactly what opportunity Zones are all about. And so kind of haven't looked back and it's been a fantastic run since then.

Yeah. And I love it. You know, the strategy of next level income is make more money, keep more money, and ultimately Grow your money. And if, you know, typically the biggest dollar of return is in that is in that second bucket actually, which is why we spent a lot of time talking about how to keep more your own money. And the opportunity Zone is interesting because. I'm sorry, go ahead.

No, I was just saying because in, in how to do that simply without getting over complicated was one of the tricks in the space. Right. And I think that to your point earlier, I think that that's one of the reasons why it got, you know, it lost a lot of momentum is because it was this big buzz and big hype. Oh, it's going to be real easy, real easy. And then when people jumped into it, they're like, oh, well, it's not so easy. No, nobody knows how to really do it. And it's expensive for the people that do know how to do it. And so we took that, you know, system that we had created doing M and A transactions for Main street and we said, hey, let's repurpose this and become the legal zoom for opportunity zones. Let's make sophisticated Wall street level documents available to Main Street America. Let's simplify how they do it and let's make it so that even, you know, smaller investors can take advantage of this program. Not just the big know, institutional type multi million zillionaires.

And that's, look, that's, that's our mission here is to help, you know, your everyday, average, quote unquote, average investor have access to the same investments that you know, you know, centimillionaires billionaires have access to or have only historically had access to when it comes to opportunity zones. You know, five years ago people got all excited and I think, you know, this is where some simple math helps out, right? I had, I had a friend, I had an investor and he said, if I invest in this opportunity Zone, even if I don't make any money for 10 years, the tax savings will outweigh that. And I said, whoa, whoa, whoa, whoa. I said, whoa, whoa, whoa. Like you're talking about, your math's a.

Little bit whacked out there, dude.

I was like, you need to make some money, you know, so I guess.

If you don't make any money, you don't pay any taxes. One way or another.

There'S an easy way to solve the tax problem and that's to make no money, right? That's exactly right. I said, well, let's back up. I said, there's like, you can have your cake and eat it too. But I think the challenge early on, I'd hear a lot of investors get excited about opportunity zones, Ashley, and say this like they say, hey, I'm going to put my money in this structure. But they didn't know what the investment is. So before we jump into how investors can actually use opportunity zones, if you don't mind explaining how the opportunity zone came into existence and what the structure is.

Sure. So I've got some slides and I'll try not to get too detailed on the slides relative to it.

Oh boy. Cool.

Yeah. So the these are opportunities. You can find these at our website@ozpros.com map or you can go to ozpros.com podcast which will link to this and some special offers just for your listeners.

Chris, Beautiful. We'll have that in the show notes as well. Ashley, thank you.

Perfect. So opportunity zones were created by the Tax Cut Obs act in order to get private capital off the sidelines and get it invested into areas that needed it the most. And so what Congress allowed the governors to do was to designate up to 25% of their low income census tracts as opportunity zones. And so, as you can see, you know, you get these census tracts out here that are kind of big and then you got all these little ones over here that are tiny and the reason why is population density. So out west, right. A census tract a lot bigger than out in the east where they're a lot more compact. And so the governor's got to designate their zones where they are. Those zones got locked in. And unfortunately this doesn't pick up Guam or Puerto Rico, but basically the whole island of Puerto Rico is an opportunity zone. They got special dispensation to design up to 98%, basically all of their low income census tracts, which is 98% of the island. And so you can see that there's lots of them in lots of different areas. There's over 8,700 of them. And the significant thing about it, right, is that there's three benefits associated with opportunity zones. The first is that you get to defer capital gains on a gain that you have. So unfortunately, you have to start with capital gain as your equity, which is kind of whack. It's like, all right, if you really wanted all kinds of money to go into these, why did you limit it to capital gains? And the answer that the Congress came up with was that we want to get capital off the sidelines, we want to pull it out of the market, we want to pull it out of traditional structures and we want to put it into these types of investments. So they said it's got to be a capital gain. And so the good thing about that is you get to defer the gain until December 31, 2026. Now prior to December of 2021, you got this additional like 10% or 15% reduction in the taxes when you went to pay them in 2026. That has expired. We anticipate that they're going to be, that there's going to be legislation going to bring that benefit back. And so let's, let's hit that a little bit later on in the podcast about like what that the possibility of that is and then what that do to the market as well. But here's the big one, right? So you know, in addition to your, you know, one set of Jinsu knives, I'm going to throw in an extra set of Jinsu knives and a permanent exclusion of your taxes in the form of a step up in basis to fair market value. And for your savvy investors, Chris, and for folks who listen to podcast, they know the power of depreciation. And the really cool thing about opportunity zones is, is that if after a 10 year hold, you not only eliminate capital gains, but you also eliminate depreciation recapture. And so that's huge.

It's like, it's like fast forwarding the benefit, you know, when you die, right? Which is you get, your heirs get to participate in the real estate in a stepped up basis, right? In these assets that you have. And a stepped up basis, but you have to die to do it.

I tell you what really interesting about that though is that in addition to giving you that step up and basis to fair market value as it relates to your planning, and this is kind of the fourth unadvertised, unreally talked about benefit, is that when you die, your estate steps into your shoes. And the reason why that's significant is because the lifetime exemption amount is going to come down in 2025 to $10 million for a married couple, $5 million per individual. So if your net worth is Approaching anywhere near 10 million bucks, you need to be thinking about how do I lock and freeze my estate value right now? One of the ways that you can do that is that the money that goes into your opportunity zone fund will stay at whatever the amount was when you put it in. And so your state the the only amount. So like let's say you had a million dollars in capital gain. Normally you would pay $238,000 next year. Well, instead you put it into an opportunity fund, you get to defer that tax until 2026. And then if you were to die between now and 2026, your estate would pay that tax in 2026. But when you die, the only amount that goes against your estate is not the fair market value at the time, it's the million dollars that you put in. And so, so it could be 2.

4, 5 million, whatever it is at that point and doesn't count against that 10 million.

Exactly. And then when your estate goes to sell it, they get a step up in basis to fair market value, which is basically whatever they sell it for. So they pay zero tax, just like you. And they also don't get hit with any kind of depreciation recapture relative to that death, which they would normally. That would normally happen. Right. And so that's a significant benefit of opportunity zones. Gotcha.

Interesting.

Yeah. And it's fascinating, right, that Congress, in three pages of legislation has, I think created the greatest place based economic incentive that has ever been legislatively created. And so then it becomes, okay, all right, how do I take advantage of it? Which I think is one of your questions about like, why did it kind of go ebb and flow and that kind of thing? That's a great question.

Yeah. I think a lot of people got excited about it and said, hey, let's, let's get a lot of money into this. But they said, well, what are we going to actually do with it? But just a quick pause. I think, you know, these, these are the types of legislation I'm a fan of. Right. You say, hey, as you said, let's, let's, let's incentivize private capital to come off the sidelines and invest it in the community, invest in infrastructure and new development and you know, put some tax incentives in place. You hear a lot of things where, you know, politicians say, oh, the rich don't pay their fair share. They're not doing this. But how do we create investments in these neighborhoods, in these areas? I mean, like, if you've been to Puerto Rico, you know, there's a severe need for infrastructure and down there and redevelopment and that sort of thing. So it makes, when I heard you say that, I was like, that's interesting because that's a, you know, it's, it's not third world country, but it's, it's a, it's rough down there when it.

Comes to infrastructure in some, I tell you what, and you know, we all remember the pictures after Maria, right. In 2017, 2018, where it's just decimated and is unbelievable how vibrant that place is now and how much is sprung back and you know, and you know post Covid how much that launched available hotel room rates. And I, they were, I think that they're the, the latest report I saw is that they are 80,000 rooms behind on hotel rooms down there. And so as a result Puerto Rico got really smart and they said hey listen, not only is the whole island an opportunity zone, but we're going to give you an extra 40% tax credit on top of the Opportunity Zone if you come in and put hotel rooms. So we raised a fund and we, we invested in three hotels in Puerto Rico as one of our investments that we did.

I love it. So let's talk about some more options about and how like how investors can actually use this structure as an investment.

Ashley so the great thing is is that as an opportunity zone deal you can either invest directly into real estate. So and I've got this thing, I call it my opportunity zone cheat sheet. Basically opportunity zones on a page. And I'm going to go real fast through this if you have questions or you want to kind of get like a, an overview or deeper drive overview. We've actually got a webinar that goes through this in detail that you could click through alpha that podcast link and, and you can explore it in greater depth or we can perfect, definitely set a strategy call as well. But you got to start from a capital gain from a sale to an unrelated party that capital gains to go into a qualified opportunity fund within 180 days. Now the great thing is is that a Q off is just it literally can be as simple as an LLC taxed as a partnership. And once your money's in that fund, you then have to invest into either directly into Opportunity zone property or you can into a qualified opportunity zone business. So the really cool thing about this is is that it doesn't necessarily have to just be real estate, it can actually be businesses. Now when you do that, at least 70% of the tangible property needs to be opportunity zone business property, which is tangible property trade or business acquired after December 31st, 2017 by purchase from an unrelated seller. So if you owned property in a zone prior to 2017, you gotta transact. Right. And or you can lease it. Exactly. Now you can and that's one of the ways that we get around that is you can self deal if you lease by so basically by doing a ground right to your related party qozb we can accomplish it that way. And this is a key piece is that the original user substantial Improvement has been in an opportunity zone. So what that means is, is that when you get your property, right. So when you buy it, you have to, it either has to be it was abandoned and you're putting it back into use or new construction. Right. That would be original use. Or if it's got a building on it, you need to double value of the building itself. You get to exclude the land, but you need to put improvements in it up to the amount of the building. Right. Now that can include like personal property purchases. So if you were to buy like a residential house and turn it into an Airbnb.

So that's why a hotel is such.

A great option hotel, because all of the TV beds, dressers, everything else is going to count towards that substantial improvement requirement.

Terrific, terrific.

So that was opportunity zones in about 90 seconds.

Yeah. And again, we'll have all these slides, we'll have a link to all these slides and everything in the show notes here. Especially if you're listening and you want to go back and take a look at this. Yeah. So again, this is, again, this is a great strategy for investors that have a capital gain, right. But they want to shift that capital gain. So let's use an example. So an investor, I know a lot of investors had like cryptocurrency gains. Talking about Puerto Rico, that was a real haven for cryptocurrency investors here past few years. So you have a cryptocurrency gain, you take a million dollar gain from Bitcoin or another cryptocurrency, you put it into an opportunity zone, delay the payment and you could then invest in hotels in Puerto Rico, for instance.

Absolutely. And you know what's crazy is that hotels in Puerto Rico are the tip of work. I mean we, I saw, I've seen bamboo farms, mobile home parks, RV parks, solar developments, wedding venues, blue collar accelerators.

I mean, you sound like an infomercial on this one. Man. Look at this, look at this. Incredible.

It's nuts, right? And it's been really cool. So We've had over 2000 strategy calls with people from across the country and man, there it's very, very few things that I'm not able to kind of create, figure out some kind of creative structure where we can make it work inside of an opportunity zone. The limitations are if you've got somewhere where you need to be. So like if you're a high end retailer, opportunity zones are probably not going to be for you. Right. Or if you got a place based tie, right. Where you can't like move and get flexible with where you put people. That's not going to work. Or if you're a company and you have a lot of overseas like developers and you can't take that out of your business model, it's probably not going to work for you unless you can really, really highly pay your US based people and into like your 50%. Like as long as you're US based people that are in an opportunity zone are making at least half of your income, you're good.

Gotcha. Interesting. So what, and that, that all makes sense. Like you, this, this isn't necessarily a fit for everything. Like a lot of people said, hey Chris, are you guys going to be doing opportunity zones with your, your multifamily properties? Well, we buy value add, like class A value add properties. So you buy something that's been built in the last 10 years, you put maybe $10,000 a door into it, it's hard to double the value.

Exactly.

Class A property.

Almost impossible.

Integrated area. Yeah, exactly. It's just, it really, it doesn't work. Whereas a redevelopment or development deal that you can make that work for something.

Like that or so like buying a condo, like a finished condo, unless it's new construction, then that would work as original use. But if you're buying a used condo, somebody's been out, it's going to be very difficult to justify doubling the value of that condo.

Yeah, yeah. What are some other pitfalls, Ashley, around the opportunity zone space that investors should be aware of?

Yeah. So there's nuances, right? There's nuances relative to some of the things that you gotta be careful of. And so it's just like anything else. Right. You have good professionals backing you up. You need to make sure that you do it correctly and you need to make sure that your, your strategy is sound. So you start with a sound strategy we can help with and then you build out what your plan is and then you backfill that plan with professionals and you make sure that your professionals understand what they're doing. The biggest challenge that I've seen is we've been doing this for five years and now as we're kind of coming into it where people are like, okay, I got my funds set up, I'm doing deals, that kind of thing, they've been talking to their, that don't necessarily know exactly what they're doing inside of opportunity zones and there's some stuff that we've got to fix. Sometimes it's fixable with fair, it's fairly easy. If they forget to file form 8996. Right. Or they don't file it timely. We gotta, you know, it's a $30,000 fix because we got a private letter ruling. And so inside of that, it's not that, it's not that difficult, but you gotta make sure that you got people that know what they're doing.

Makes sense. Makes perfect sense. Now, Ashley, you don't just do opportunity zones, is that right?

No, and it's been fascinating. Right. So as we, as we went into opportunity zones, that kind of consumed us for like the first couple of years. And in the back of my mind, I knew that these taxes were going to come due in 2026. So I was like, all right, how can we best mitigate and come up with a plan for how we're going to reduce or eliminate those taxes in 2026? And, you know, so we were working on solar, but we were concerned about how the investment tax credits were lowering. And so then with the passage of the Inflation Reduction act this last year, solar has exploded for us because it is a fantastic way. We've got a provider that actually has solar deals inside of opportunity zones. And then on top of that, what we can do is we can take their tax deferred money, we can buy them a solar business. They're actively involved in the solar business, and they can use all of the depreciation to offset their active income without having to go through the, the fairly process of becoming a real estate professional. And so it's like the best of all worlds. And it's like, holy cow, this is like. Well, I don't even know what the analogy is that something got married. And I love that baby.

Yes. So it is interesting, the inflation Reduction act in the naming, but that's, that's the topic.

Yeah, I. Yeah, yeah, that's, that's a whole different conversation. But I'm really stoked about the, you know, the energy piece that came out of it.

Yeah. No, so this is. Okay, so explain how, how that piece works, because I'm, I'm familiar. We have solar panels in our house. We got some great tax credits, federal and state. Yep. From that. And a lot of people don't realize that North Carolina is, I think we're what, number two in the nation for solar? Is that, Am I right on that?

I didn't realize we're, we're up there.

Yeah, we're, we're one of the top states in the, in the, in the country. And I think Duke Power is the, the biggest provider of or biggest investor in Solar. So I just, it's, it's interesting how the, the, the all of the above energy strategy.

Sure.

And I just, just finished up a conversation on small modular nuclear reactors which are really interesting as well.

Now that's fascinating. Is that a podcast? Because I'm listening to that one.

It, I'll get, I'll send you some information here. Yeah, that was, yeah, the one just, just prior to this we touched on it very, the opportunity in uranium and small nuclear reactors and how they can, or small modular nuclear reactors and how they can potentially help solve, you know, some of these issues. But again, I'm a big, big fan of solar as well.

Sure.

Especially if we can put them on things like our houses or the types of, you know, self storage facilities or you know, land, land that's not being used. So what's an example of, of how that would, how that would actually functionally work? Ashley?

So the, and we're still waiting on final guidance on this. I'm fairly comfortable that Opportunity Zones are going to qualify for one of the adders. So when they pass Inflation Reduction act, the first thing they did is they made the investment tax credit go back up to 30% and they extended that out for 10 years, which was huge because it was, it was going down and pretty rapidly stepping down. So the fact that you get an investment tax credit of 30% just off the board is awesome. Then if you're American made with like a ship program and if you're under a megawatt, you don't have to have the apprenticeship program, it just has to be American made, you get an extra 10% adder. Then on top of that there's low income adder, which we're fairly confident that Opportunity Zones will classify for that. So inside of an Opportunity Zone deal, you know, there's a real possibility that you could get 50% tax credit off of the solar. That's happening. Right.

And that's, let me pause there. That's a 50% tax credit.

Dollar for dollar, right?

50% tax credit. That's not a tax deduction. Nope, it's a tax credit.

So then on top of that you get all the depreciation associated with the panels. So that's a, that's a double whammy in Opportunity Zone land. The first reason is because you could run it up and the way that we've structured our partnership with, with the gentleman that's, that's doing this stuff is that it becomes an active trader business. So you're able to take this capital gain, make the defer it, make the investment into, you know, your own solar business and now all of that and offset it against ordinary income. Oh, and hey, by the way, we can take 75% of that back three years, right? So we can offset it, right against, well, that's on the ITC on the depreciation, right. We can use that to offset ordinary income. That's on the tax credit. We could take that back three years, right. On the depreciation. We can use it to offset what your gain is. Right. Immediately. And, and then we can also carry that forward. So if you've got taxes that you incurred, if, if you, if it was through a S Corp or a partnership, we can still defer those taxes through the Opportunity Zone program. So what we can do is we can now take 22 gains, right, all the way back to January 1, 2022 if it came through an S Corp or a partnership. And we can defer that right now until 2026. So what that allows us to do is to take a portion of that money, buy solar and we can use that depreciation to offset that and not have to use our investment tax credits. And so it's, it's unbelievably powerful. And you know, effectively what it ends up becoming is, is that you're, you make around 100 depending on what state you live in. If you're in Texas, where there's no state income tax, it's around 125% year one. If you're in California, it's 150% year one on your solar investment. Then you get a residual off of that as well. And it's, it's quite frankly mind blowing.

Well, look, I think this is a good, this is a good spot to stop because we have people that are probably interested in learning more here, Ashley. And we're running out of time. We are going to have link in the show notes so people can check out the slides that you just showed. They can also schedule a call. What's the best way for listeners to find out more about what you and your team does?

Yeah, so we've got a couple of ways that you can interact. Right. So we've got our, our webinar. And so if you go to the ozpros.com/podcast site, you can, you can sign up for the webinar, you can watch that. And we've got some kind of free, cool free tools at the end of that webinar that, that in, in order to incentivize folks to kind of push through and you know, doing another webinar right after Covid. Nobody wants to do dang webinar anymore. But then we also have direct strategy calls. So if you want to either to myself or somebody on my team, you can book a strategy call directly. And we've got discounted links for those strategy calls. And then finally we set up qualified opportunity and qualified opportunity zone businesses. We've got packages for that and, and we'd be happy to get, you know, folks roll in if they're like, hey, no, I know I got a deal. I'm ready to roll. Let's get this, make this happen. We are by far the cheapest, most comprehensive package in the United States. And I think that I can confidently that we've set up more opportunity funds than anybody else in the nation.

Beautiful. Well, if you're listening today, you want to learn more about what Ashley and his his team does, check out those links in the show notes. Ashley, thank you so much for being on the show today.

Chris, thanks for having me. It's been a pleasure. Hopefully we can help your, your listeners save some tax.

Hey, Chris, here again. I hope you found this episode valuable. Now I have one more thing to gift you. We have a page for my coaching clients where you can get a free copy of my book as well as much more from previous guests on the show. Just check out nextlevelincome.com coaching to get a free copy of my book audiobook and much more. I'll send you a copy of my book and cover all the shipping costs as a thank you for listening to the podcast. Also, please like share and take just 90 seconds to give us a rating on Apple Podcasts.