A Q&A with Garrett Dinsmore on diversification, tax benefits, and opportunity zones
In this article Garrett shares how private real assets may support income generation, tax-aware planning, diversification and inflation resilience for high-net-worth and ultra-high-net-worth families. For families evaluating private real assets through both an investment and tax lens, Qualified Opportunity Zones have become an increasingly important part of the conversation.
Opportunity zones were introduced in 2017 to drive private investment into lower-income neighborhoods while offering investors a range of benefits. The program has become so attractive that the U.S. Department of Treasury’s office of Tax Analysis reports more than $110 billion has been invested since its launch. From tax benefits to compelling risk-adjusted returns, Garrett explains why opportunity zones and private real asset investments are worth consideration.
Q: What are private real assets and why are they attractive to investors?
There are three primary categories of real assets: real estate, infrastructure and natural resources. Most investors are familiar with commercial or residential real estate as an investment vehicle. Infrastructure could include power plants, toll roads or telecommunications towers. Agriculture, timberland, oil, gas, metals and mining would represent natural resources.
Private real assets offer several benefits, including attractive risk-adjusted returns and a source of income. These investments can be a good source of portfolio diversification, as they tend to be less correlated with other asset classes, like public equities.
Investing in real assets can also act as a hedge during periods of heightened inflation, and the revenue that real assets generate, particularly rent from commercial and residential investment property, often increases in parallel with inflation.
There are also tax benefits associated with investing in private real assets.
Q: What are the tax benefits of investing in private real assets?
There are several different tax benefits associated with real assets.
Depreciation is one. Many private real assets generate depreciation in the initial years of investment that can be used to offset current income.
The REIT deduction is another. If you invest in a private REIT (Real Estate Investment Trust), 20% of the income that the REIT generates may not be subject to income tax.
There are also unique structures, such as 1031 exchanges. With private real estate, any capital gains you generate from a sale can be rolled into a new investment, and tax liability is then deferred.
A more recent tax benefit for private real asset investors is Qualified Opportunity Zones.
Q: What are the core benefits of real estate Qualified Opportunity Zone investments?
The Qualified Opportunity Zone Program was established in 2017 to incentivize development in underinvested communities by providing tax breaks. Investors could defer the tax liability on a realized gain and invest it in a Qualified Opportunity Fund (QOF), where it would grow tax-free.
These realized gains could come from property or business sales or from portfolio diversification efforts. Capital gains invested into a QOF are granted deferred tax liability for five years and can grow tax-free if held for at least 10 years. Investors can also receive a 10% step-up in basis on the original investment.
The original program was set to expire in 2026, eliminating an investor’s ability to meet the holding periods needed for the original basis increases. QOZ 2.0 changes that. It makes the program permanent, begins a new round of Opportunity Zone designations in 2027, and provides new designation rounds every ten years. Most importantly for investors, it replaces the single 2026 deadline with a rolling five-year deferral period for qualifying investments made under the new program.
An Example of How a Qualified Opportunity Zone works
An investor sells stock for $800,000 with a $300,000 tax basis, creating a $500,000 long-term capital gain. Assume the investor is subject to the federal long-term capital gains rate of 20% and the 3.8% net investment income tax, for a combined 23.8% federal rate, and invests the full $500,000 gain in a qualifying QOF. Without the QOF election, the estimated federal tax on the gain would be $119,000. Under QOZ 2.0, that tax may instead be deferred for five years. After the 10% basis increase, only $450,000 of the original gain would generally be recognized, producing an estimated federal tax of $107,100, a reduction of $11,900, in addition to the value of the five-year deferral. If the $500,000 QOF investment then grows at an assumed 10% annually, it would be worth approximately $1.3 million after ten years. The roughly $797,000 of appreciation may be excluded from federal capital gains tax if the investment and investor satisfy all applicable requirements. At the assumed 23.8% rate, that represents approximately $190,000 of additional federal tax benefit to the investor.
This illustration assumes the tax due after five years is paid from other assets and excludes state taxes, fees, cash distributions, and other tax consequences. The 10% annual return is hypothetical; actual results will vary, and neither investment performance nor tax treatment is guaranteed.
Q: When are opportunity zones appropriate and when are they not?
Opportunity zones may be appropriate for investors who have recently realized a capital gain and are looking for a tax-efficient way to reinvest that gain over a long-term horizon.
They can be particularly attractive for investors who are comfortable committing capital for at least 10 years, since the full tax benefits depend on holding the investment over that period. For the right investor, opportunity zones can provide exposure to development projects while offering the ability to delay taxes on the original gain, increase the investor’s basis and potentially avoid capital gains tax on the opportunity zone investment itself.
They may not be appropriate for investors who need access to their capital sooner, have a shorter investment horizon or are focused primarily on immediate income. They also should not be pursued only for the tax benefit. The underlying investment still needs to make sense on its own, including the manager, strategy, market, development plan and risk profile.
Q: Who are the investors best suited for private real asset investments?
Private real assets can be appropriate for accredited investors, including high-net-worth and ultra-high-net-worth families, who are looking for diversification, income, potential inflation protection and exposure to investments that may behave differently from public equities.
They may be especially relevant for investors who want a more stable and predictable component within a broader portfolio, particularly when compared with growth-oriented private investments such as private equity or venture capital.
Because many private real asset investments require longer holding periods and may be harder to sell quickly than public stocks or bonds, they are generally better suited for investors who can commit capital over a longer time horizon and do not need immediate access to those funds.
Q: How do real assets fit into a high-net-worth portfolio?
Real assets can play an important role in a high-net-worth portfolio because they can provide diversification, income and potential inflation protection.
They tend to behave differently from public equities and other traditional asset classes, which can help balance a portfolio across different market and economic cycles. When one part of the portfolio is under pressure, real assets may respond differently than public equities or other growth-oriented investments.
Real assets are often viewed as a lower-risk part of the portfolio relative to private equity or venture capital. While the target returns may be lower, they can offer more stability, more predictable income and the benefit of owning something tangible.
Q: You mentioned REITs. What is the difference between real assets and REITs? Do they have different tax benefits?
Real assets are the underlying investments. They are physical assets, such as buildings, infrastructure, farms, timberland, energy assets or other natural resources.
A REIT, or Real Estate Investment Trust, is a structure that can be used to hold certain real asset investments, particularly real estate. In other words, a REIT is not the asset itself. It is one way investors can access real estate or other qualifying real asset investments.
The tax benefits can differ depending on the structure. Many private real assets may generate depreciation, which can help offset income from the investment in the early years. When an investment is held through a REIT, investors may also be able to deduct 20% of the income generated by that REIT. Other real estate structures, such as 1031 exchanges or qualified opportunity zones, may provide additional tax benefits depending on the investor’s situation.
Q: Are there risks related to real assets?
Yes. Like any investment, real assets carry risk.
Private real assets are generally long-term investments and may be harder to sell quickly than public stocks or bonds. Investors may not be able to access their capital when they want to, and returns can depend heavily on the quality of the manager, the structure of the investment, the use of leverage and the market environment.
There can also be risks tied to the specific asset. Real estate may be affected by occupancy, rents, interest rates or local market conditions. Infrastructure investments may be affected by regulation, contracts or usage levels. Natural resources can be influenced by commodity prices, weather, operating costs or broader economic conditions.
That is why manager selection, structure, terms and alignment of interest are especially important when evaluating private real asset opportunities.
Q: How does Caprock evaluate private real asset opportunities and managers?
Caprock evaluates hundreds, if not thousands, of real estate and private real asset managers each year.
The evaluation process looks at several factors, including the organization sponsoring the investment, the resources dedicated to the strategy, the structure and terms of the opportunity, and whether there is a strong alignment of interests between the manager and investors.
Caprock also evaluates the manager’s track record and whether the manager has been able to generate the types of returns it is targeting. Just as importantly, Caprock considers the current market environment and whether the opportunity is compelling compared to other options available to clients.
Determining whether private real assets are the right investment should start with a conversation with a financial advisor.
Start a conversation with Caprock today and see if they are right for your portfolio.
About Garrett Dinsmore
Garrett Dinsmore is Director of Real Assets at Caprock. Drawing on prior experience investing in private markets on behalf of pensions and endowments, Garrett brings deep perspective on the growing demand for sophisticated access to alternative and private market investments among individuals and families. At Caprock, he helps families evaluate private real asset opportunities with an emphasis on thoughtful manager selection, portfolio fit and tax-aware planning. He also serves as an Associate Board Member for the Seattle Alternative Investment Association.
