New York budget decouples from opportunity zone gain exclusion

The 2021-2022 fiscal year budget passed by both New York state legislative houses on April 7 and signed into law by Governor Cuomo on April 19 disallows the exclusion of gains invested in Qualified Opportunity Zones (QOZs) retroactive to January 1, 2021. The tax package bill, S2509c, requires taxpayers to add back to their New York taxable income gains excluded under the Qualified Opportunity Zone (QOZ) rules for federal tax purposes, effective for taxable years beginning in 2021.

The Qualified Opportunity Zone deferral was enacted as part of the Tax Cut and Jobs Act of 2017 and allowed investors to defer, and partially exclude, qualified gains reinvested in targeted communities as designated by state authorities.

Under section 1400Z-2 of the Internal Revenue Code (IRC), gains invested in Opportunity Zones can be deferred until December 31, 2026 and are eligible for partial exclusions of 10% or 15% if held for longer than five or seven years, respectively. Additionally, investors holding their interest for at least 10 years may elect to increase their basis to the fair market value of the investment at that time, allowing them to exclude their subsequent gain on the Opportunity Zone investment from federal taxation.

The bill does not address the exclusion of gains for existing investments on gains recognized prior to 2021, nor does it tax the subsequent step up to fair market value for qualified investments held for longer than 10 years. Taxpayers with eligible gains recognized during their 2020 taxable year may still be eligible to defer their gains by making a qualified investment as allowed under the IRC Section 1400Z-2, potentially until September 11, 2021, for gains coming from passthrough entities

Mazars’ Insight

Taxpayers thinking about investing gains recognized during 2021 in Qualified Opportunity Zones who are either New York residents or have New York sourced income should carefully consider the effects of the budget bill on their taxes due, as they may be subject to double taxation at the state level.

For example, assume a nonresident of New York sells real property located in New York in 2021 and invests that gain in a Qualified Opportunity Zone business or fund.  The taxpayer would be subject to tax in New York in  2021 but no taxes due in their state of residence, assuming their state conforms to the QOZ rules.  When tax on the deferred gain is due in 2026, the taxpayer would have tax due in their state of residence, but no offsetting credit for the taxes paid to New York in 2021, resulting in double taxation.  Likewise, New York residents who defer gains sourced to other states would have no out-of-state taxes due on their income for New York resident tax credit purposes in 2021, thus paying New York tax in 2021 and nonresident tax in 2026.

Please contact your Mazars professional for additional information.

Published on April 21, 2021