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Qualified Opportunity Zones and State Taxes


Our topic of Qualified Opportunity Zones and state taxes is worthwhile from a societal standpoint because the focus is increased business investments in less advantaged areas. There are rules aimed at resolving what investments meet the criteria for being in an area designated as a qualified opportunity zone.

Jun 23rd 2021
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When we discussed federal tax incentives on Qualified Opportunity Zones (QOZ) last year, the rules were that federal tax incentives included capital gains deferral with an element of forgiveness if the gain is reinvested in 180 days, then the investment is held five years by December 31, 2026. 

There is currently an added 5 percent of gain forgiveness if a qualifying investment is held seven years by the end of 2026, but that benefit cannot be reached with new investments.  

NOTE: Barring legislative changes, 2021 is the last year for investments to qualify for the 10 percent gain forgiveness. 


As to new investors, there is the prospect of short-term or long-term capital gain deferral plus the prospect of 10 percent gain forgiveness if the investment is held for five years.  For QOZ investments held ten years, there is generally forgiveness of gain as to the investment itself.

Beyond our scope here is a discussion of the myriad IRS qualification rules governing the QOZ investment entity, and the sundry pandemic-related pronouncements mitigating some of the rules affecting the OOZ investment vehicle and the investor.

State Taxation

For most investors and their advisors, there is the added consideration of state taxes. State tax collections generally were significantly adversely affected by income declines arising from the pandemic, but recently there have also been significant state tax revenue turnarounds (“Pandemic Drives Historic State Tax Revenue Drop,” Rosewicz, Theal and Fall, Pew Trusts, 2/17/21,  updated by “State Tax Revenue Passes a Recovery Milestone,” 5/7/21; 

The context of these unusual times suggests the tax researcher continue to update research as to the state tax rules governing benefits from investments in qualified opportunity zones. In general, there continue to be many states with important tax incentives to QOZ investments.

The federal-state differences here may include limiting qualification to in-state QOZ designation, or certain tax years, or adding minimum wage requirements, restricting certain participation, and adding application and reporting requirements (“State Tax Treatment of Opportunity Zone Fund Investments,” Wolters Kluwer, 5/28/20).

A useful resource categorized by federal-state conformity or lack thereof is the following: “Opportunity Zone Resource Center, State Tax Code Conformity – Personal Income, State Tax Code Conformity – Corporate, and State Opportunity Zones Information,”  Novogradac CPAs,

There are a fair number of states which do not tax capital gains.  The biggest category here is conforming states, those that either automatically or by legislation regularly conform to federal rules. Our list focuses on individual taxation:

  • Automatics -  Connecticut, Colorado, Delaware, Georgia, Illinois, Kansas, Louisiana, Maryland, Missouri, Montana, Nebraska, New Mexico, North Dakota, Oklahoma, Utah.
  • Recurring legislation – Arizona, Idaho, Indiana, Iowa, Kentucky, Maine, Michigan, Minnesota, New Jersey, Ohio, Oregon, Pennsylvania, South Carolina, Vermont, Virginia, West Virginia, Wisconsin.

Other states may fall within the limited conformity or nonconformity category. For example, California has declined to conform, so the gain deferred for federal purposes would likely incur California tax.

New York conformed to the federal rules deferring capital gains, but then in April, 2021, Governor Cuomo signed legislation denying exclusion of gain invested in QOZs for taxable years beginning on or after January 1, 2021. Thus, there does appear to be an element of retroactivity to the New York expansion of the definition of taxable gains.   

Retroactive Tax Increases

We noted the retroactive New York provision which has been enacted. Retroactive tax increases are also being discussed on the federal side.  There is talk that if President Biden’s proposed major increase in the taxation of larger long-term capital gains is enacted, it may be retroactive to April 28, 2021. 

This was the date he spoke of such tax increase in a speech to Congress. Of course, Congress would need to enact such provision and agree to make it retroactive.

Speculation about the particulars of such legislation could raise any number of questions, but in the author’s opinion, one of the questions here might focus on any impact of retroactivity on the 180-day rule for deferring capital gains invested in QOZ funds (“Biden Budget Said to Assume Capital-Gains Tax Rate Increase Started in Late April,” Rubin, Wall Street Journal, 5/27/21;

Concluding Perspective

We anticipate deferral of capital gains via QOZ funds will be an increasingly important part of the tax planner’s resources.  Investments in QOZs in 2021 can also qualify for 10 percent forgiveness of gain.

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