What is an Opportunity Zone?
The IRS defines Opportunity Zones as areas within a community that are economically distressed.
Opportunity zones are “census tracts with a poverty rate of at least 20 percent or where the median family income does not exceed 80 percent of statewide median income.”
The IRS goes further to specify that a maximum of 25 percent of a state’s low-income census tracts may be designated as opportunity zones. Qualified Opportunity Zones must be nominated by the state and certified by the US Treasury Department.
Opportunity Zone Funds
Opportunity zones are a hot topic in commercial real estate right now. You may have read headlines about real estate investors putting a qualified Opportunity Fund together or longtime property owners listing their real estate portfolios located within an Opportunity Zone.
All this buzz revolves around the enticing incentives the IRS has offered in order to encourage development in the low-income areas. These incentives are designed for patient investors; each incentive is tied to the longevity of an investor’s stake in a qualified Opportunity Fund.
What Are Qualified Opportunity Funds?
A qualified Opportunity Fund is a privately managed investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (the vehicle must hold at least 90 percent of its assets in qualified opportunity zone property).
What types of tax benefits are available when investing through a qualified Opportunity Fund?
There are three different types of tax incentives available for investing in low-income communities through a qualified Opportunity Fund. These incentives are temporary deferral, step-up in basis, and permanent exclusion.
- Temporary Deferral: Investors may have the option to temporarily defer inclusion in taxable income for capital gains reinvested into a qualified Opportunity Fund.
- Step-Up In Basis: Investors may be able to exclude up to 15% of the original gain from taxation through a step-up in basis. In a step-up in basis, the basis is increased by 10% if the investment in the qualified Opportunity Fund is held by a taxpayer for at least 5 years and increased by an additional 5% if held for at least 7 years.
- Permanent Exclusion: Investors may qualify for a permanent exclusion from capital gains taxation due to sale or exchange if the investment is held for a minimum of 10 years. The exclusion only applies to gains accrued after an investment in a qualified Opportunity Fund.
Chicago Opportunity Zones Map
How did Chicago decide which areas to recommend as Opportunity Zones?
Of the more than 500 eligible census tracts, the City of Chicago recommended 133 to the State of Illinois for designation as Opportunity Zones. In order to identify potential Opportunity Zones, the City worked alongside alderman to identify census tracts with the most need and opportunity for investors. You can read more about their criteria here.
To view a map of Chicago’s proposed Opportunity Zones click here.
Where can I get more information about Opportunity Zones?
The government has published several websites intended to provide more information about Opportunity Zones and investing through qualified Opportunity Funds. Here is a list of government resources:
- Illinois Department of Commerce and Economic Opportunity: Guide to Opportunity Zones
- CDFI Fund: Guide to Opportunity Zones
- CDFA: Guide to Opportunity Zones
How is 33 Realty’s Investment Brokerage team preparing to help Chicago’s real estate investors benefit from the government funded program?
33 Realty will be attending Bisnow’s upcoming conference – Chicago Opportunity Zones and 2019 Forecast on Thursday January 24th, 2019. We look forward to sharing with you what we learn about Chicago’s Opportunity Zones and outlining our strategy for investing through a qualified Opportunity Fund.