About Chicago Opportunity Zones
The Qualified Opportunity Zone (“QOZ”) program seeks to encourage investment and stimulate economic growth in certain distressed communities by providing various federal income tax benefits to taxpayers who invest in real estate and businesses that operate within these zones. In order to enjoy these tax benefits, the following must occur:
1. Capital Gains Accrued – An individual or entity generates capital gains from a sale with an unrelated party.
2. Gains Invested in a Qualified Opportunity Fund (“QOF”) – Within 180 days from the time of the gain it must be invested in a QOF. Note that if the gain is flowing to a partner or a shareholder from a partnership or corporation, the individual has 180 days from the end of the entity’s tax year.
3. QOF Invests the Gain – In order for the deferral to qualify the QOF must invest the gain or allocate 90% of it in a qualified opportunity zone project and invest the funds within 180 days from the date it receives the funds.
4. QOF Files Form 8996 – The partnership or corporation that will invest in a qualified opportunity zone investment must file Form 8996 with the filing of its tax return to elect to be a QOF
5. QOF Member Files Form 8949 – The individual or entity that elects to defer its capital gain amount in a QOF file Form 8949 with their income tax return for the year they elect to defer the gain.
6. Meet “Substantial Improvement” Requirement – Within 30 months of acquisition additions to the basis of the property must exceed the amount of the adjusted basis of the property at acquisition.
7. 2026 Pay Deferred Tax – Tax on the capital gains will be paid in 2026 at the rate of tax on the original applicable gain classification. If the QOF investment was held for 5 years you will only pay tax on 90% of the gain and if it was held for 7 years you will only pay tax on 85% of the gain.
While the tax deferral and reduction in basis are attractive benefits of the program, probably the best benefit is that if you hold the QOF investment for at least 10 years, when you sell the investment you will not pay tax on the appreciation.
The Opportunity Zone incentive could spur substantial new capital flows into targeted neighborhoods within Chicago and Cook County. Of the 327 Opportunity Zones in Illinois, 135 are within Chicago city limits, and 46 others are outside Chicago but within Cook County.
Restrictions on which projects qualify are minimal compared with other federal community development programs. A few “sin” businesses are excluded outright. Beyond this, a few key clauses determine what constitutes a qualified project. As defined in the statute, to be eligible for investment, 50 percent of a business’s gross income must come from the “active conduct” of the business.
Recently proposed IRS regulations articulate that for a business to be a Qualified Opportunity Zone project under the proposed rule, it is required to hold only 70 percent of assets within Opportunity Zones. Additionally, per this new guidance, the “substantial improvement” clause, which requires QOF to spend at least as much on improvements to a property as was paid to acquire it, will apply only to the buildings acquired and not the underlying land. These proposed regulations also provide Opportunity Funds up to 31 months to invest the capital gains and extend the permanent exclusion on new gains to up to 2048 if the investment is held.
Contact Ashley to discuss your goals and see if this investment strategy might benefit you. Not only can QOF investments diversify your portfolio potentially bringing higher returns, they can also help you make a positive difference in your community.