QOZ Alert: New York Decoupling from Deferral of Tax for Capital Gains

The New York State Budget bill currently before Governor Cuomo for signature has a provision repealing the deferral of tax for capital gains for the taxable year invested in qualified opportunity funds (QOFs) effective for taxable years beginning on or after January 1, 2021. Previously, New York followed federal treatment which provides that a taxpayer is eligible to defer recognition of eligible gain until the earlier of an inclusion event or December 31, 2026. Furthermore, for federal purposes, such taxpayer may be able to reduce such deferred gain by 10% (through a step-up in basis), if a QOF investment is held for at least five years prior to December 31, 2026.

While it appears that the investment of capital gains will still benefit from the step-up on sales after ten years, the partial decoupling from the federal benefit may have significant state tax impacts for taxpayers investing gains from sales of property outside their state of residence. For example, a New Jersey resident taxpayer selling property in New York and investing in a QOF after January 1, 2021 will pay tax in New York on the gain in 2021 but not in New Jersey, which recognizes the deferral. When the taxpayer recognizes the gain in New Jersey in 2026, no credit will be available for the tax paid to New York for 2021. This results in double taxation. The same results would apply for New York resident taxpayers investing gains subject to tax in other states (i.e., sale of New Jersey property) which are invested in QOFs.