New York State 2022 Budget Decouples Opportunity Zone Tax Benefits from Federal Tax Benefits
The New York state FY 2022 budget bill signed by Governor Andrew Cuomo on April 19 includes a provision that “decouples” certain state income tax benefits for qualified opportunity zone (QOZ) funds from those provided under federal tax law. The change is effective January 1, 2021.
New York State income tax laws historically have conformed to federal income tax law, with few exceptions. Thus, the decoupling of the QOZ rules is considered a rare move by state legislators.
Under current federal tax law, qualified opportunity fund (QOF) investors enjoy three tax benefits. The “QOF deferral benefit” allows the deferral of income tax on capital gains invested in a QOF until December 31, 2026. The “QOF reduction benefit” reduces the amount of the deferred capital gains recognized at the end of 2026 by 10 percent for investments made during 2021. Finally, the “QOF exclusion benefit” allows taxpayers who hold their QOF investments for 10 years or more to completely exclude any gain and associated income tax on their eventual sale, if sold before 2047. New York’s budget provision eliminates the first two benefits for New York taxpayers while keeping the QOF exclusion benefit intact.
The new provision poses a potential state income tax conflict for multistate taxpayers. For example, a Massachusetts taxpayer that realizes capital gains on the sale of property located in New York will be able to defer Massachusetts income tax for amounts invested in a QOF, because Massachusetts conforms to the federal QOZ rules. However, the taxpayer will pay New York income tax on those gains. At the end of 2026, when the deferred capital gains are recognized in Massachusetts, there will be no offsetting tax credit for the New York income tax paid for 2021. Similar results may occur for New York residents or part-year residents investing in QOFs outside of New York state.
Taxpayers should keep this potential conflict in mind while planning investments in QOFs domiciled or operating in New York State, as should QOF investors that have income tax nexus to New York state and are planning investments in QOFs outside of New York state.