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Bad Break Up? NY Decouples From Fed For QOF Gain Deferral

  • Governor Cuomo announces $212 billion budget for New York State’s (NYS) 2021-2022 fiscal year, cuts benefits on QOF investing

The tax code mirroring between the federal government and NYS has long since been a game of Simon Says. For the past sixty years since the state revamped its tax law, New York, in most instances, has automatically adopted any federal tax codes as its own.

These days, however, the state has been putting down an independent iron foot, often opting against federal precedents. The latest and most notable: NYS’s rejection of the $10,200 unemployment tax exemption and now the state’s decoupling from federal QOF deferrals.

What exactly is QOF?

Qualified Opportunity Funds (QOF) are investment vehicles for Qualified Opportunity Zone (QOZ) properties located in economically distressed communities. The IRS incentivizes high-income investors to make equity investments in QOFs by providing generous tax benefits of long-term deferral or exclusion of recognition of capital gains. The goal of the opportunity zone program is less about providing tax breaks to high earners than it is about jumpstarting economic activity in low-income areas.

NYS Leaves Its Comfort Zone For Qualified Opportunity Zones

NYS has participated in the program and currently conforms to the federal code set forth by the TCJA in YEAR? Currently, investors are granted both the deferral and exclusion of capital gains from their New York taxable incomes.

Cuomo’s new bill decouples NYS from federal QOF treatment, thereby revoking deferral and exclusion benefits and imposing a tax on all fully realized capital gains included in NYS income as of January 1, 2021.

Further, the new bill proposes higher tax rates for capital gains, meaning that not only would such equity investments now be subject to taxes but at higher rates than before.

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