I would imagine that the gain is taxed for state tax purposes in the year of the sale and the gain included in income for 2026 is backed out. However, you would have to review the applicable state law.
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What happens with the gain recognized on the sale of a capital asset in states not conforming with the OZ rules?
Can I do anything to get around the fact that my state hasn’t conformed with the OZ regulations?
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I'm only licensed to practice in New York, but to my knowledge, if you're in a non-conforming state, there's nothing realistic you can do.
If the state has not conformed, it only affects an investor located in a non conforming state such as California. If a California resident invests in an Opportunity Zone fund, the gain is deferred for federal income tax but not for California income tax. Furthermore, if the investment is held 10 years any gain would be tax-free for federal but not-tax free for CA. The fund and be in a non-conforming state and still get tax-free treatment for federal income tax. Since New York is a conforming state, any New York resident investor who invests a capital gain in an Opportunity Zone fund will have the capital gain deferred for federal and NY income tax. A 10-year hold will make the gain on the investment tax-free.
Not really. You would be able to defer the gain for federal tax purposes but not for state tax purposes.
The state law of the sale is not an issue. Federal tax law controls as to the capital gain.
Investors in non-conforming states can still take advantage of the federal OZ incentives, but will be subject to state tax on recently-realized capital gain. Depending on other sources of income/cash flow, an investor in a non-conforming stay may want to reinvest only a portion of recently realized gains in a QOF to ensure he has adequate cash available to cover his state income tax liability related to that gain.
The tax benefits in such states would still apply to your federal tax return. You would just have to follow state tax laws for purposes of your state tax return. Therefore, in an income tax state, you would simply by the state tax due on the gain but not federal taxes. This is very common, as most states have not conformed.
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