The 2017 federal Tax Cuts and Job Acts (TCJA) granted taxpayers new tax benefits for investing in Qualified Opportunity Zones (QOZs). However, not all states are on board with the changes. Before you make an investment, consider whether your state conforms to the TCJA.
What Is a QOZ?
A QOZ is an area designated by the IRS as economically disadvantaged or distressed. Taxpayers can defer capital gains tax on the sale of a property by reinvesting the gains in a property located in a QOZ.
Depending on the length of time the QOZ investment is held, the investor may be able to defer or eliminate capital gains tax until as late as Dec. 31, 2026. Taxpayers are also entitled to a capital gain exclusion of:
- 10% if the QOZ investment is held for at least five years.
- 15% if the QOZ investment is held for at least seven years.
- 100% if the QOZ investment is held for at least 10 years.
Since the capital gains tax will be deferred no later than Dec. 31, 2026, that means the investor must have rolled over gains into a Qualified Investment Fund (QOF) by 2021 to realize the 10% benefit and by 2019 to take advantage of the 15% benefit.
Importance of a State's Conforming Status
States can choose whether to conform with QOZ tax benefit changes outlined in the TCJA. By conforming with these changes, a state grants taxpayers full tax benefits for investing in QOZs. Most states conform, but some do not.
If you live in a nonconforming state or invest in a QOF with QOZs located in a nonconforming state, you may not receive state tax benefits. In some cases, you may even be required to recognize gains for state tax purposes. Investors must review specific state regulations before setting up an investment vehicle.
Nonconforming States for QOZ
Some states don't conform with QOZ tax benefits. These states include:
- California: California does not currently conform. However, in the 2019-2020 state budget, the governor proposed conforming for investments in affordable housing or green technology.
- Mississippi: Mississippi does not currently conform.
- North Carolina: North Carolina does not currently conform. In fact, the state passed legislation requiring taxpayers to add deferred or eliminated capital gains back to their reported income.
Partially Conforming States for QOZ
Some states partially conform with QOZ tax benefits, including:
- Arkansas: Arkansas conforms to QOZ tax benefits for QOZs located in Arkansas.
- Hawaii: Hawaii conforms with QOZ tax benefits for QOZs located in Hawaii.
- Massachusetts: Massachusetts conforms with QOZ tax benefits for corporate income taxes but not individual income taxes.
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