I live in CA. If I have a capital gains event and want to invest in a QOZF, does California recognize this deferral like the IRS does? Or am I paying taxes on my state income when I receive my capital gains?
Non-conforming states simply do not recognize deferral or the basis adjustments in the federal statute. The capital gain and the subsequent OZ investment are both treated as "normal" (i.e., non-OZ) items on the corresponding state tax returns. This creates an accounting headache and zaps out beneficial tax treatment at the state level, but the outcome is clear, unfortunately.
Unfortunately, even though you can defer the gain for federal income tax purposes, you are still subject to California income tax on the gain.
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