If you’re on the hunt for a lucrative investment property in Chicago, you’ve probably heard of Opportunity Zones. Although they can be risky investments, the payoff from an Opportunity Zone can be huge! Here is what you need to know before you decide to invest.
Defining Opportunity Zones
The term “opportunity zones” originated in the Tax Cuts and Jobs Act of 2017 as a way of referring to economically distressed areas that could be used as investment property. To be considered “economically distressed,” the area must meet some qualifications, including the following:
- The poverty rate in the area must be at least 20%
- Median family income in the area must be twenty percent lower than the national average household income.
- The United States Treasury Department must approve the area as an Opportunity Zone
It’s important to know that are limits on how many Opportunity Zones can exist in a given state. The IRS only allows twenty-five percent of the low-income areas within a state to be Opportunity Zones. Not just anyone can give this label to any area, and the process of designating an Opportunity Zone takes time. The IRS and Treasury Department established the first Opportunity Zones in April 2018. You can view a map of Chicago Opportunity Zones here: https://www.chicago.gov/city/en/depts/dcd/supp_info/opportunity-zones.html
You may need an Opportunity Fund to purchase in an Opportunity Zone. This is simply financing that has been set aside explicitly for the purpose of investing in Opportunity Zones.
Why should I invest in an Opportunity Zone?
The Tax Cuts and Jobs Act of 2017 exists to improve economically distressed areas by offering tax cuts to investors. The IRS hopes that by offering these incentives, low-income areas will become less common.
Some of the specific tax benefits to investors include:
Temporary Tax Deferral
If you invest in an opportunity zone, you can usually temporarily defer your taxable income from your investment property Chicago. In order to qualify, you must reinvest 90% of your assets back into an opportunity fund.
Step Up Basis Exclusion
This exclusion is based around how long you have maintained your investment in an Opportunity Zone. If you’ve owned investment property Chicago for five years, you can exclude ten percent of your capital gains from taxation. If you’ve owned the investment property for seven years, you can exclude up to fifteen percent of your capital gains from your taxes. No matter how long you’ve owned the property, you must be reinvesting your gains into an opportunity fund to qualify for this exclusion.
If you’ve kept your investment for at least ten years, you could qualify for permanent exclusion on capital gains taxation for your Opportunity Zone. However, you must invest the gains into an opportunity fund.
If you’re looking for investment properties Chicago, true to their name, Opportunity Zones come with endless opportunity! They are relatively inexpensive and come with tax benefits, which means you get to keep more money and reinvest it back into the property. You can also help economically distressed areas while you’re making money. There are over 130 Opportunity Zones in Chicago waiting for your investment to unleash their full potential.