Also, which states haven’t passed legislation to conform to the OZ federal tax incentive?
Novogradac & Co. has an interactive map that can tell you which states are conforming and which states aren't. I don't believe you can get state benefits if you live in a non-conforming state, even if you invest in a conforming state, because your state of residence will still have the ability to tax you on your total income.
The simple answer is state taxation of the gain rolled into a QOF and state taxation of gain from a sale after 10 years, but presumably no taxation of the 85% of the deferred gain included in income in 2026. I am not sure which states follow or don't follow the regime. I am based in Oregon, which automatically connects to federal tax changes. Accordingly, legislation was not needed to conform to the federal benefit. Instead, there would need to be a law to explicitly de-couple. A bill for this was proposed in the 2019 Oregon legislative session but did not go anywhere.
That is a function of local state tax law. So I cannot offer any guidance. States are getting onboard. So the number is changing. CA is expected to get onboard.
If you invest in a conforming state you will get the same benefits for state tax purposes. If you invest in a non-conforming state, you will still owe the state tax on your deferred gain and you may owe state tax on any gain after you sell your investment. I think 44 states conform (or have no state tax), but notably California does not.
Some states conform while others do not conform. There are a handful of states that are working on legislation to conform. In states that do not conform, a taxpayer will not be eligible to defer the capital gain for state purposes.
OZ laws are federal and thus apply to federal taxation of residents in any state. Certain states have passed corresponding legislation, some are in process, and others have not acted. For states with no current corresponding legislation, state taxes would still be owed on any gain received from the sale of the initial asset giving rise to the OZ investment, and perhaps the eventual sale of the OZ investment, which would be treated the same as if it were a cash investment. For conforming states, there may be some tax incentives similar to those at the federal level.
Non-conforming states include: CA, HI, NC, MA, MS, PA. There are also a number of states with no income tax or no tax imposed on capital gains. If you live in a conforming state but invest in a non-conforming state, you will not pay tax up front. But then you will likely have tax implications when the QOF or underling assets are sold. If you live in a non-conforming state you will have less to invest in a QOF since the state will require an up-front payment for the state tax on the initial sale and your new investment will not get basis step-ups in years 5,7 and 10. Also, check your state on whether you need to reinvest within your state vs. being able to invest in other states.
If your state of residence is not conforming, you will probably not obtain the same benefits as if it were.
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