California Punts on Qualified Opportunity Zone (QOZ) Conformity
September 19, 2019
By Ken Weissenberg
The California legislative session has ended for the year with no action on Opportunity Zone Fund (OZF) conformity. The OZF provision allows for the deferral and partial reductions of capital gains invested in OZFs. The zones are designated in economically distressed areas throughout the United States and its territories. For federal tax purposes and those states that have conformed to federal law, the tax on gains invested in QOZs is deferred until 2026. The California legislature does not go into session again until January 2020.
California and other non-conforming states create a potential for double taxation at the state level for capital gains earned by nonresident asset sellers. States generally provide a credit for tax paid to nonresident states on income that is subject to tax in their state of residence. In the year that a nonresident sells property in California, the taxpayer will be subject to tax on the gain in California. If the taxpayer elects to invest that gain in a QOZ, the conforming resident state will not tax the gain until 2026. In 2026, the taxpayer will not have income from California, so there is no credit for tax paid to California since the income was recognized in the earlier year of sale. For a deep dive on Qualified Opportunity Funds, including the most recent rules and regulations, download Qualified Opportunity Funds: A Guide for Real Estate Investors.