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How can California residents enjoy the full tax advantages of Opportunity Zone investments?
I would like to know if residents of California can receive the same tax benefits by investing in an Opportunity Zone. Is it possible to defer California state tax liabilities for up to 7 years?
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As of the last update for California residents, the state was not conforming to the Opportunity Zone tax benefits. The issue, though, is being considered by the state Legislature and governor to conform. Short of moving away from California, there is not much a California resident can do at this point.
California residents pay both federal and state tax. Therefore, CA residents will get the full tax benefits of the Opportunity Zone for federal tax purposes. However, CA state income taxes are not eligible for any tax benefits.
California residents get the same benefits for federal tax as a person in a conforming state. The downside is that there is no break against California income. This is a major reason that a California residents qualifying for a 1031 exchange may choose to do an exchange rather than defer via Opportunity Zone investing. In making such a decision consult with a tax professional who can review all your unique issues to see if an OZ investment is your best option.
This is really a question for your CPA. But as of the date of this email, California has not joined in, so the OZ investment is federal only. I’ve heard California investors haven’t been slowed by this problem, but that is purely anecdotal.
No, unlike most states, California has not passed legislation to offer state-level incentives for Opportunity Zone investments.
Whether you can enjoy the same benefits at the state level will depend on whether the state has adopted conforming legislation. I understand California has adopted very limited benefits, but I am not up to date on which ones they have adopted. I recommend you to consult a California CPA.
Unfortunately, if the gain has been triggered while you are a California resident you must report the California gain in the year of sale, even if you invest in an OZ fund. Relocating before the gain is reportable is one option. If you are dealing with real estate, it is best to structure a 1031 transaction. California is not inclined to conform to the OZ program, other than possibly affordable housing and/or clean energy production.
I am not licensed in California, but my understanding is that California's state tax code has not conformed to the OZ rules under federal law, so the tax benefits from the OZ program are not available at the state level in California.
Opportunity Zones are a federal tax incentive, and at least 38 states have conformed their own tax law to the federal in order to further encourage and support revitalization of their communities. In the case of California, Gov. Gavin Newsom's Budget Summary 2019-20 provides that state will conform to federal law allowing for deferred and reduced taxes on capital gains only if invested in green technology or in affordable housing in Opportunity Zones, and for the exclusion of gains on such investments held for 10 years or longer. In summary, unlike the majority of states, California's imposes restrictions that the majority of conforming states have not imposed. To quote real estate developer Ian Barth of Bauen Capital, "Market-rate housing, office, industrial and retail redevelopment will derive no benefit from California’s proposed Opportunity Zone tax incentives as they do in states like Nevada, Florida and Texas. As a result, the vast majority of these dollars specifically allocated to redevelopment of struggling Sacramento and California communities will be spent in other states."
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