One of the highlights of the 2017 Federal Tax Cuts and Jobs Act (TCJA) is the Qualified Opportunity Zone (QOZ) program that gives taxpayers the ability to defer and potentially eliminate certain capital gains. Effective starting in 2018, the program is available for a limited window of time, and only provides incentives throughout a ten-year tax deferral period. To continue learning about the program, take a look at the timeline below, or read more here.
Just like with any amendment to the Internal Revenue Code (IRC), it is important to understand whether states will conform to that change. Most states have implemented the changes made by the TCJA, and since those states tend to start their computation of the income tax base with either federal taxable income (for corporations) or federal adjusted gross income (for individuals), the federal QOZ tax benefits will be incorporated for state income tax purposes as well.
Investors should note that this is not true for all states, and below we have identified some examples of states that do not fully conform to the federal QOZ tax benefits. Unless otherwise noted, these rules apply to both corporations and individuals.
To further complicate matters, one QOZ investment opportunity may be a portfolio with multiple locations across several states. This could result in an allocation by the state of the capital gains and/or differing recognition periods. Taxpayers that reside in a non-conforming state and/or invest in a QOZ fund that holds assets in QOZs located in a non-conforming state should analyze the impact on their state income taxes as they may not receive any tax benefits at the state level. Investors in these states may also be required to recognize gain for state tax purposes on their eventual sale of the opportunity fund investment.
A state’s conformity with the federal opportunity zones provisions is an important factor investors should consider.
It’s important to note that QOZ investments are at the higher end of the risk spectrum. Investors considering the opportunity should consult with their tax professional to better understand how the capital gains deferral and/or elimination applies to them directly. If you have questions and want to learn more about QOZ investments, please call a Realized financial professional at 877-797-1031.