Investors.
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Our investors represent individuals from across industries and geographies, family offices, registered investment advisors and foundations. Dunleer makes it possible for individual investors to evaluate, invest and monitor a variety of real estate assets directly alongside an experienced and aligned operating partner with no middle man.
We put our own money into every limited partnership and asset manage each property as our own. We are investing for our partners and with our partners, ensuring an alignment of incentives. Simply put, Dunleer is committed to treating our investors as we would like to be treated. Not only is it the right thing to do, but we believe that attracting a like-minded investor base provides a competitive advantage for us to perform on our disciplined, long-term, and sometimes contrarian investment process.
Investor Education.
The Tax Benefits of Investing in Opportunity Zones.
Investors have capital gains. A variety of events can generate these gains—perhaps the sale of a public stock, the sale of real estate, or a company. Many investors will then look to minimize their tax exposure through certain tax mitigation strategies. Opportunity Zones provide significant tax benefits and the social benefit of investing in economically under-served communities. The goal of Opportunity Zones and the Opportunity Funds they spawn is to benefit areas that are economically distressed by attracting private investors to bring capital to invest in the area.
Investing in Opportunity Zones allows you to defer and even reduce the amount that would otherwise be owed on capital gains tax. Best of all, if held for 10 years, no tax is owed on the appreciation in the value of the property.
As of this writing, there are 8,764 Opportunity Zones within the U.S. The areas run the gamut from urban to suburban to rural in terms of population size. To see which areas are eligible for incentives under the program, check out HUD’s QOZ map.
The Opportunity Zones program offers three tax benefits for investing in low-income communities through a qualified Opportunity Fund:
A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier date on which the opportunity zone investment is disposed of, or December 31, 2026.
A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
Many investors do not fully understand depreciation and the associated tax advantages. No discussion on real estate investing would be complete without a brief explanation of what real estate depreciation is and how it works.
What Is Real Estate Depreciation?
Real estate depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property placed into service by the investor. Depreciation is essentially a non-cash deduction that reduces the investor’s taxable income. Many investors refer to it as a “phantom” expense because they are not actually writing a check. It is merely the IRS allowing them to take a tax deduction based on the perceived decrease in the value of the real estate.
Real estate depreciation assumes that the rental property is actually declining over time due to wear and tear. But we know this is not typically the case. Not many other forms of an investment offer comparable depreciation deductions. As a result of real estate depreciation, the investor may actually have cash flow from the property but may show a tax loss.
What Is the Benefit of Showing an Investment Property Tax Depreciation?
The benefit is to lower the overall tax liability (subject to certain limitations). This can help real estate investors save hundreds to thousands per year on their taxes. Rental property investors can include depreciation as one of the expenses on Schedule E when they file their yearly taxes. The tax liability will be reduced according to which tax bracket the investor is in. That percentage will determine the amount of the deduction.
To illustrate the intersection of crypto, thoughtful tax planning and real estate come together, assume a crypto investor residing in New York purchased 100 Bitcoin on April 1, 2020, for $660,000. Assume she sold all 100 coins on Dec. 31, 2020, for $2,880,000, resulting in a short-term capital gain of $2,220,000. Assume the taxpayer is single and had other net taxable income of $600,000. That means she is subject to income tax at the highest federal and New York marginal income-tax rates.
The federal income tax on this gain would be $905,760 (37 percent on short-term capital gains and 3.8 percent for the NIIT, for a combined 40.8 percent effective tax rate), and the New York income tax would be $195,804 (8.82 percent tax rate). This results in a combined tax liability of $1,101,564 (49.62 percent).
Under the OZ regulations, if the taxpayer reinvests all or a portion of these short-term gains into a QOF within 180 days from Dec. 31 (June 28, 2021), then the gain will be deferred. However, due to COVID’s continuing impact, if the sale of a directly held asset (vs. K-1 reported) occurred between Oct. 5, 2019 and July 5, 2020, then the 180-day reinvestment period would fall within the extended reinvestment periods provided in IRS Notice 2020-39and 2021-10. This allows extra QOF funding time through at least March 31, 2021. Investors with calendar 2020 K-1 gains will have until Sept. 10, 2021 to be reinvested (since the 180-day period begins on March 15, 2021). Taxpayers who timely reinvest those gains into a QOF and follow the other OZ re-investment requirements can defer federal (and most state) taxes until Dec. 31, 2026.
Since the QOF investment will have been held for more than five years on that date, only 90 percent of the gain will then be reportable. Holding the QOF or the underlying QOF assets for 10 years or more will result in complete tax-free treatment of the post-reinvestment appreciation in the QOF or assets held by the QOF for federal and state purposes other than in California, Mississippi, North Carolina and Massachusetts. Residents of these states will not obtain the initial deferral and subsequent step-up benefits of the OZ program for state purposes. In addition, any tangible property investments into these states generally will generate taxability upon exit from those investments — even if residing outside those states.
Assuming tax rates hold steady through the end of 2026, this amounts to a tax savings of $110,156 (49.62 percent x $222,000 of excluded gain) and allows the taxpayer the interest-free use of the remaining deferred tax liability of $981,408 ($1,101,564 – $110,156) for a period of almost six years.
For taxpayers with patience, the OZ tax program allows for diversification of asset investment classes, a powerful tax deferral and ultimately the avoidance of tax on all post-reinvestment appreciation from the investment date until the date the QOF investment is liquidated or sold, which can be anywhere from 10 to almost 30 years in the future (the investment incentive ends on Dec. 31, 2047).
Although a small number of states have declined to adopt the OZ tax benefits, the vast majority of states do follow the federal OZ provisions, and some states even provide additional incentives for OZ investors.
Cryptocurrency has gained favor because it offers impressive flexibility and an alternative investment strategy to bold investors. The “Land of OZ” may well be the next frontier for crypto investors and others generating short-term gains in the market, and the ultimate tax tool for maximizing the after-tax economic return on those 2020 cryptocurrency gains. You are likely to see more and more of your forward-thinking clients gravitating toward crypto and OZ. If you haven’t done so already, get up to speed on both cryptocurrency tax treatment and opportunity zone investment rules.
Source: https://www.accountingtoday.com
While real estate security token offerings have been around for a few years, the increased adoption of cryptocurrencies and the emergence of decentralized finance (“DeFi”) protocols have created a powerful use case for the tokenization of additional assets, such as real estate. This article summarizes the basics of a tokenized real estate fund offering, as well as some additional benefits and considerations for issuers considering a security token offering.
Tokenization of real estate broadly refers to the process of representing interests in real estate assets on a blockchain or distributed ledger in the form of a token, the ownership of which can be transferred via the blockchain’s protocol. Tokenization is part of a larger trend in fintech over the last decade towards democratization of assets and disintermediation of traditional gatekeepers. The evolution of the cryptocurrency markets over the past few years has further accelerated this movement, allowing broader access to investments and greater control for investors. At its core, the tokenization of real estate makes it easier to buy and sell real estate interests, adding liquidity to the market while increasing transparency and security, and reducing costs and risk compared to traditional private real estate securities.
How Does it Work?
While there are different forms of real estate tokenization, the focus of this article is on the tokenization of interests in real estate funds or single asset syndications. In a typical real estate syndication, investors purchase equity in a limited liability company or limited partnership that owns an underlying property. In this context, tokenization refers to the representation of such LLC or LP interests in the form of tokens that can be custodied directly by investors and traded or used as collateral in smart contracts.
Much like a traditional fund offering, the issuer must first make some basic decisions about the offering, such as what type of security is being offered and what exemption(s) to registration will be relied on, taking into account such factors as the total number of investors, the location of investors, whether investors should be accredited and also whether public solicitation is desired. Issuers will also need to prepare customary offering documents, including operating agreements, subscription agreements, a private placement memorandum and appropriate risk factors for the specific investment being offered, and make appropriate SEC and/or state filings.
So, given that so far a lot looks similar to a traditional offering, what’s different? Issuers will have to make a few more decisions and consider some tweaks to their normal deal terms. For starters, given that tokens will exist on a blockchain, issuers must first decide which blockchain will be used taking into consideration issues like transaction fees, security, and scalability. In addition, many tokenized offerings give investors the option of investing with cryptocurrencies such as Bitcoin or ETH. Doing so may be attractive to investors, but raises the issue of how to deal with conversion and escrow of funds in a deal that will ultimately need US dollars to purchase and operate the real estate.
Once the offering details are finalized, issuers will issue tokens representing the rights of securities holders. These tokens typically include built-in compliance features, such as appropriate restrictions on transfers and secondary trading. The offerings must still comply with applicable KYC requirements, and take appropriate measures to protect user data. Lastly, consideration should be given to mechanisms for payment of distributable cash, which can, for example, be made using stablecoins (i.e. coins pegged to the US dollar), as well as appropriate reporting requirements to make future valuation of tokens possible.
At present, the dominant form of tokenization relies on the Ethereum platform through the issuance of ERC-20 tokens, or non-fungible token interfaces, such as ERC-721 or more recently, ERC-1155 token. As noted, tokens can further be programmed to address compliance issues, such as limiting transfers during a lockout period or limiting transfers to whitelisted wallets that have passed applicable screening requirements. Issuers have the option of developing their own tokens or utilizing the services of an increasing number of crowdfunding platforms, NFT platforms, and even transfer agents that support the issuance of tokenized offerings on behalf of issuers.
Benefits of Tokenization
Tokenization and the incorporation of blockchains more broadly offers unique advantages. Issuers benefit from the ability to access new sources of capital while taking advantage of the compliance and administrative ease of smart contracts. Investors benefit from the trust-minimizing features of blockchain and smart contracts, allowing more secure investments and greater access to investment opportunities. Both issuers and investors will ultimately benefit most from the ability to hold equity interests in a form that can be deployed in smart contracts for frictionless borrowing and lending, which has the potential to increase liquidity and enhance the return profile of real estate assets.
Challenges in Realizing the Full Potential of Real Estate Tokenization
While tokenization of real estate offers many benefits, effectively realizing those benefits presents a number of challenges that will need to be addressed to realize the true potential of the space. Regulatory challenges present the most significant obstacle, given that even issuers that want to create liquidity in secondary exchanges remain subject to KYC and AML requirements, as well as a minefield of other considerations ranging from licensing and reporting obligations. The still-nascent adoption of cryptocurrency and DeFi mean that it could take time for the type of widespread adoption that facilitates seamless borrowing and exchanges. Issuers will also need to tread carefully to ensure that the tokenized structure fits within the larger capital stack, where mortgage lenders and other counterparties less familiar with tokenization could be reluctant to entertain new structures.
- Opportunity Zones
-
The Tax Benefits of Investing in Opportunity Zones.
Investors have capital gains. A variety of events can generate these gains—perhaps the sale of a public stock, the sale of real estate, or a company. Many investors will then look to minimize their tax exposure through certain tax mitigation strategies. Opportunity Zones provide significant tax benefits and the social benefit of investing in economically under-served communities. The goal of Opportunity Zones and the Opportunity Funds they spawn is to benefit areas that are economically distressed by attracting private investors to bring capital to invest in the area.
Investing in Opportunity Zones allows you to defer and even reduce the amount that would otherwise be owed on capital gains tax. Best of all, if held for 10 years, no tax is owed on the appreciation in the value of the property.
As of this writing, there are 8,764 Opportunity Zones within the U.S. The areas run the gamut from urban to suburban to rural in terms of population size. To see which areas are eligible for incentives under the program, check out HUD’s QOZ map.
The Opportunity Zones program offers three tax benefits for investing in low-income communities through a qualified Opportunity Fund:
A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on the earlier date on which the opportunity zone investment is disposed of, or December 31, 2026.
A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.
- Depreciation
-
Many investors do not fully understand depreciation and the associated tax advantages. No discussion on real estate investing would be complete without a brief explanation of what real estate depreciation is and how it works.
What Is Real Estate Depreciation?
Real estate depreciation is an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property placed into service by the investor. Depreciation is essentially a non-cash deduction that reduces the investor’s taxable income. Many investors refer to it as a “phantom” expense because they are not actually writing a check. It is merely the IRS allowing them to take a tax deduction based on the perceived decrease in the value of the real estate.
Real estate depreciation assumes that the rental property is actually declining over time due to wear and tear. But we know this is not typically the case. Not many other forms of an investment offer comparable depreciation deductions. As a result of real estate depreciation, the investor may actually have cash flow from the property but may show a tax loss.
What Is the Benefit of Showing an Investment Property Tax Depreciation?
The benefit is to lower the overall tax liability (subject to certain limitations). This can help real estate investors save hundreds to thousands per year on their taxes. Rental property investors can include depreciation as one of the expenses on Schedule E when they file their yearly taxes. The tax liability will be reduced according to which tax bracket the investor is in. That percentage will determine the amount of the deduction.
- Crypto
-
To illustrate the intersection of crypto, thoughtful tax planning and real estate come together, assume a crypto investor residing in New York purchased 100 Bitcoin on April 1, 2020, for $660,000. Assume she sold all 100 coins on Dec. 31, 2020, for $2,880,000, resulting in a short-term capital gain of $2,220,000. Assume the taxpayer is single and had other net taxable income of $600,000. That means she is subject to income tax at the highest federal and New York marginal income-tax rates.
The federal income tax on this gain would be $905,760 (37 percent on short-term capital gains and 3.8 percent for the NIIT, for a combined 40.8 percent effective tax rate), and the New York income tax would be $195,804 (8.82 percent tax rate). This results in a combined tax liability of $1,101,564 (49.62 percent).
Under the OZ regulations, if the taxpayer reinvests all or a portion of these short-term gains into a QOF within 180 days from Dec. 31 (June 28, 2021), then the gain will be deferred. However, due to COVID’s continuing impact, if the sale of a directly held asset (vs. K-1 reported) occurred between Oct. 5, 2019 and July 5, 2020, then the 180-day reinvestment period would fall within the extended reinvestment periods provided in IRS Notice 2020-39and 2021-10. This allows extra QOF funding time through at least March 31, 2021. Investors with calendar 2020 K-1 gains will have until Sept. 10, 2021 to be reinvested (since the 180-day period begins on March 15, 2021). Taxpayers who timely reinvest those gains into a QOF and follow the other OZ re-investment requirements can defer federal (and most state) taxes until Dec. 31, 2026.Since the QOF investment will have been held for more than five years on that date, only 90 percent of the gain will then be reportable. Holding the QOF or the underlying QOF assets for 10 years or more will result in complete tax-free treatment of the post-reinvestment appreciation in the QOF or assets held by the QOF for federal and state purposes other than in California, Mississippi, North Carolina and Massachusetts. Residents of these states will not obtain the initial deferral and subsequent step-up benefits of the OZ program for state purposes. In addition, any tangible property investments into these states generally will generate taxability upon exit from those investments — even if residing outside those states.
Assuming tax rates hold steady through the end of 2026, this amounts to a tax savings of $110,156 (49.62 percent x $222,000 of excluded gain) and allows the taxpayer the interest-free use of the remaining deferred tax liability of $981,408 ($1,101,564 – $110,156) for a period of almost six years.
For taxpayers with patience, the OZ tax program allows for diversification of asset investment classes, a powerful tax deferral and ultimately the avoidance of tax on all post-reinvestment appreciation from the investment date until the date the QOF investment is liquidated or sold, which can be anywhere from 10 to almost 30 years in the future (the investment incentive ends on Dec. 31, 2047).
Although a small number of states have declined to adopt the OZ tax benefits, the vast majority of states do follow the federal OZ provisions, and some states even provide additional incentives for OZ investors.
Cryptocurrency has gained favor because it offers impressive flexibility and an alternative investment strategy to bold investors. The “Land of OZ” may well be the next frontier for crypto investors and others generating short-term gains in the market, and the ultimate tax tool for maximizing the after-tax economic return on those 2020 cryptocurrency gains. You are likely to see more and more of your forward-thinking clients gravitating toward crypto and OZ. If you haven’t done so already, get up to speed on both cryptocurrency tax treatment and opportunity zone investment rules.Source: https://www.accountingtoday.com
- Real Estate Tokenization
-
While real estate security token offerings have been around for a few years, the increased adoption of cryptocurrencies and the emergence of decentralized finance (“DeFi”) protocols have created a powerful use case for the tokenization of additional assets, such as real estate. This article summarizes the basics of a tokenized real estate fund offering, as well as some additional benefits and considerations for issuers considering a security token offering.
Tokenization of real estate broadly refers to the process of representing interests in real estate assets on a blockchain or distributed ledger in the form of a token, the ownership of which can be transferred via the blockchain’s protocol. Tokenization is part of a larger trend in fintech over the last decade towards democratization of assets and disintermediation of traditional gatekeepers. The evolution of the cryptocurrency markets over the past few years has further accelerated this movement, allowing broader access to investments and greater control for investors. At its core, the tokenization of real estate makes it easier to buy and sell real estate interests, adding liquidity to the market while increasing transparency and security, and reducing costs and risk compared to traditional private real estate securities.
How Does it Work?
While there are different forms of real estate tokenization, the focus of this article is on the tokenization of interests in real estate funds or single asset syndications. In a typical real estate syndication, investors purchase equity in a limited liability company or limited partnership that owns an underlying property. In this context, tokenization refers to the representation of such LLC or LP interests in the form of tokens that can be custodied directly by investors and traded or used as collateral in smart contracts.
Much like a traditional fund offering, the issuer must first make some basic decisions about the offering, such as what type of security is being offered and what exemption(s) to registration will be relied on, taking into account such factors as the total number of investors, the location of investors, whether investors should be accredited and also whether public solicitation is desired. Issuers will also need to prepare customary offering documents, including operating agreements, subscription agreements, a private placement memorandum and appropriate risk factors for the specific investment being offered, and make appropriate SEC and/or state filings.
So, given that so far a lot looks similar to a traditional offering, what’s different? Issuers will have to make a few more decisions and consider some tweaks to their normal deal terms. For starters, given that tokens will exist on a blockchain, issuers must first decide which blockchain will be used taking into consideration issues like transaction fees, security, and scalability. In addition, many tokenized offerings give investors the option of investing with cryptocurrencies such as Bitcoin or ETH. Doing so may be attractive to investors, but raises the issue of how to deal with conversion and escrow of funds in a deal that will ultimately need US dollars to purchase and operate the real estate.
Once the offering details are finalized, issuers will issue tokens representing the rights of securities holders. These tokens typically include built-in compliance features, such as appropriate restrictions on transfers and secondary trading. The offerings must still comply with applicable KYC requirements, and take appropriate measures to protect user data. Lastly, consideration should be given to mechanisms for payment of distributable cash, which can, for example, be made using stablecoins (i.e. coins pegged to the US dollar), as well as appropriate reporting requirements to make future valuation of tokens possible.
At present, the dominant form of tokenization relies on the Ethereum platform through the issuance of ERC-20 tokens, or non-fungible token interfaces, such as ERC-721 or more recently, ERC-1155 token. As noted, tokens can further be programmed to address compliance issues, such as limiting transfers during a lockout period or limiting transfers to whitelisted wallets that have passed applicable screening requirements. Issuers have the option of developing their own tokens or utilizing the services of an increasing number of crowdfunding platforms, NFT platforms, and even transfer agents that support the issuance of tokenized offerings on behalf of issuers.
Benefits of Tokenization
Tokenization and the incorporation of blockchains more broadly offers unique advantages. Issuers benefit from the ability to access new sources of capital while taking advantage of the compliance and administrative ease of smart contracts. Investors benefit from the trust-minimizing features of blockchain and smart contracts, allowing more secure investments and greater access to investment opportunities. Both issuers and investors will ultimately benefit most from the ability to hold equity interests in a form that can be deployed in smart contracts for frictionless borrowing and lending, which has the potential to increase liquidity and enhance the return profile of real estate assets.
Challenges in Realizing the Full Potential of Real Estate Tokenization
While tokenization of real estate offers many benefits, effectively realizing those benefits presents a number of challenges that will need to be addressed to realize the true potential of the space. Regulatory challenges present the most significant obstacle, given that even issuers that want to create liquidity in secondary exchanges remain subject to KYC and AML requirements, as well as a minefield of other considerations ranging from licensing and reporting obligations. The still-nascent adoption of cryptocurrency and DeFi mean that it could take time for the type of widespread adoption that facilitates seamless borrowing and exchanges. Issuers will also need to tread carefully to ensure that the tokenized structure fits within the larger capital stack, where mortgage lenders and other counterparties less familiar with tokenization could be reluctant to entertain new structures.
