Key Takeaways:
- Not all states conform to federal Qualified Opportunity Zone (QOZ) tax benefits. In nonconforming states like California and New York, investors may still owe state-level capital gains taxes.
- State conformity affects both the initial capital gains deferral and the future tax treatment of QOF-related gains.
- Investing across state lines—especially when the investor and project are in different conformity states—can lead to unexpected tax liabilities.
- 1031 exchanges and DSTs may offer more consistent federal and state-level tax treatment than QOZs.
What Are Qualified Opportunity Zones (QOZs)?
A QOZ is an economically distressed area designated for long-term investment under the 2017 Federal Tax Cuts and Jobs Act (TCJA). They are designed to encourage private, long-term investment in underserved urban and rural communities.
Investors can defer federal capital gains by reinvesting the proceeds into a Qualified Opportunity Fund (QOF) within 180 days of the gain recognition event.
If certain conditions are met, investors may benefit from:
Tax Deferral:
- If an investment was made before January 1, 2027, capital gains can be deferred until the earlier of the date the QOF investment is sold or December 31, 2026 (per the original TCJA rules).
- After the One Big Beautiful Bill Act (OBBBA) took effect, for investments made on or after January 1, 2027, gains can now be deferred until the earlier of the sale date or five years from the investment date—replacing the fixed 2026 deadline with a rolling five-year window.
Capital Gains Exclusion:
- If a QOF investment is held for at least 10 years, investors may exclude 100% of the capital gains generated from the appreciation of that investment—both under the original rules and after the One Big Beautiful Bill Act (OBBBA). This long-term tax benefit remains a key incentive of the Opportunity Zone program.
Why State Conformity Matters for QOZ Investments
While QOZ benefits apply at the federal level, states are not required to follow suit. State conformity refers to whether a state adopts federal tax code provisions.
Types of State Conformity
- Rolling conformity: Automatically adopts federal changes
- Static conformity: Adopts federal code as of a certain date
- Selective or no conformity: Chooses which provisions to follow
In nonconforming states, investors may not receive any state tax benefits—meaning they could still owe state capital gains tax on deferred or excluded federal gains.
Which States Do Not Conform to QOZ Tax Benefits?
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. Investors must review specific state regulations before setting up an investment vehicle.
Nonconforming States
- California: As of March 2019, California does not conform to federal QOZ provisions. Capital gains deferred or exempted under federal rules are still fully taxable by the state.
- New York: As of April 2022, New York retroactively (to January 1, 2021) decoupled state and city corporate and personal income tax law from the Federal QOZ program.
Partial or Uncertain Conformity
- Arkansas: As of May 2019, Arkansas conforms to QOZ tax benefits for QOZs located in Arkansas.
- Massachusetts: As of June 2019, Massachusetts conforms to corporate excise tax, but not personal income tax.
Recent Conformity
- Mississippi: As of January 1, 2025, Mississippi fully aligned with federal law for all Mississippi QOZs.
Note: Laws may evolve. Investors should confirm current conformity status with a tax professional or local state authority.
What Non-Conformity Means for Investors
Example
If a Maryland investor places capital gains into a QOF project located in California, they receive federal tax deferral—but not California state tax deferral or exclusion. Those gains may still be taxed by California.
Additionally, if the QOF investment produces new gains (e.g., appreciation in the project), federal tax law allows for full exclusion after a 10-year hold. But nonconforming states may still tax those gains, undermining the overall benefit.
These discrepancies can lead to multi-state tax exposure, especially in cross-jurisdiction investments where the investor and QOZ are in different states.
How to Strategically Plan for State Tax Impacts
While QOZs offer attractive federal tax benefits, investors must factor in state-level tax consequences. Here’s how to prepare:
Strategic Planning Tips
- Consult a state-specific tax advisor before investing in a QOF. Tax treatment varies significantly by state.
- Compare projected returns against potential state tax liability. For example, a New York resident investing in Arizona may have a very different outcome than a Texas or Florida resident.
- Consider geographic alignment. Investing in QOZs located in states that do conform may simplify your tax exposure.
Consider a 1031 Exchange
For investors concerned about state-level tax uncertainty, a Section 1031 Exchange may be a more suitable alternative for tax deferral.
A 1031 exchange allows capital gains deferral when the proceeds from an investment property are reinvested into a like-kind replacement property. Unlike QOZs, 1031 exchanges are widely accepted at both the federal and state levels—making them a consistent tax deferral tool across jurisdictions.
You may also consider investing via Delaware Statutory Trusts (DSTs), which qualify for 1031 exchanges and provide added flexibility and professional management.
Know Your State’s QOZ Position Before Investing
Qualified Opportunity Zones can offer strong tax advantages and meaningful community impact. But not all states provide the same benefits.
Before investing:
- Review your state’s conformity status
- Understand cross-state implications
- Plan for both federal and state tax outcomes
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This material does not constitute an offer to sell or a solicitation of an offer to buy any security. An offer can only be made by a prospectus that contains more complete information on risks, management fees and other expenses. This literature must be accompanied by, and read in conjunction with, a prospectus or private placement memorandum to fully understand the implications and risks of the offering of securities to which it relates. As with all investing, investing in private placements is speculative in nature and involves a degree of risk, including loss of your principal. Past performance is not necessarily indicative of future results and forward-looking statements and projections are not guaranteed to achieve the results described and your actual returns may vary significantly. Investments in private placements are illiquid in nature and there may be no secondary market or ability to sell the investment should the need for liquidity arise. This material should not be construed as tax advice and you should consult with your tax advisor as individual tax situations will vary. Securities offered through Capulent, LLC Member FINRA, SIPC.
