New York Decouples from Certain Opportunity Zone Provisions
Enacted as part of the Tax Cuts and Jobs Act, Opportunity Zones were created as a tax-incentivized stimulus for investments in underserved communities throughout the United States. Opportunity Zones offer several attractive benefits to taxpayers who are looking to defer capital gains including:
- Capital gains that are reinvested into a Qualified Opportunity Fund (QOF) are not taxed until the earlier of the taxpayer’s disposition of the QOF investment or tax year 2026.
- Capital gains reinvested into a QOF and held for five years receive a 10 percent step up in basis; gains held for seven years receive a 15 percent step up.
- Lastly, for any investments that are held for at least 10 years, any appreciation within the QOF is nontaxable to the taxpayer.
While New York initially adopted the legislation in 2018, the fiscal 2022 budget introduced legislation that decoupled from certain aspects of the Federal Opportunity Zone tax treatment. Effective January 1, 2021, for New York purposes, taxpayers will not be able to defer gains or receive a step up in basis for gains reinvested into the QOFs. Any gains deferred Federally, will be “added back” for New York purposes in the year of deferral. When the gains are subsequently realized for Federal purposes, the losses will be “subtracted out” of New York state income.
Although New York has decoupled from the deferral of capital gain reinvestments and step up in basis provisions, it has not decoupled from all benefits of Opportunity Zone investments. New York has not decoupled from the provision that appreciated investments held for at least 10 years are nontaxable upon realization. The tax-free appreciation of gains has been viewed by many taxpayers as the most critical and beneficial Opportunity Zone provision. New York taxpayers should still consider this benefit when evaluating investments in Opportunity Zones.
It is also important to note that the decoupling from the Opportunity Zone provisions only affects New York taxpayers, not the New York Opportunity Zones. For example, a California resident with a capital gain can reinvest the gain into a New York Opportunity Zone and take advantage of all the provisions at both the Federal and California level.
These decoupling modifications do not apply to any gains New York taxpayers have previously invested into Opportunity Zones. In addition, taxpayers with 2020 capital gains will not be subject to the decoupling provisions, provided the gains are reinvested timely.
Whether you are currently evaluating an investment into an Opportunity Zone or want to understand more about New York’s new legislation, please contact Jeff Bowden, Tax Principal ([email protected]), Kevin McHale, Senior Tax Manager ([email protected]), or your Anchin Relationship Partner.