Progress in California
So far 41 states have decided to conform to the Federal Tax treatment for Opportunity Zones. In such states, investors may defer state capital gain tax in addition to the Federal capital gain tax as well as earning a step up in basis to market value at the conclusion of a 10 year investment hold. These are powerful incentives for investors to make investments in Qualified Opportunity Funds. Many states that aren't seen as 'tax-friendly' have chosen to match already, including New York. With the new change in the Governorship in California, industry watchers have been unclear which path Sacramento will follow. Pessimism aside, there are hopeful signals appearing.
Just this past week, California Governor Gavin Newsom, released his Proposed Budget Summary for California’s 2019 – 2020 fiscal year. One item popped out to our eyes—Governor Newsom stated that California would conform to federal legislation with respect to Opportunity Zones. Although there are details to clarify, this is a huge development for California taxpayers.
Governor Newsom’s Proposed Budget Summary mentioned California’s conformity to the Federal program in two places. The conformity is first mentioned in conjunction with Enhanced Infrastructure Financing Districts (EIFDs) and how conforming to federal law would make EFIDs in California a more effective economic development tool. Specifically, the text of the proposed budget states that “[t]he state will also make EIFDs a more attractive economic tool by pairing them with the federal Opportunity Zones program. To make Opportunity Zones more effective, the state will conform to federal law allowing for deferred and reduced taxes on capital gains in Opportunity Zones for investments in green technology or in affordable housing, and for exclusion of gains on such investments in Opportunity Zones held for 10 years or more.” California’s conformity to the Federal Opportunity Zone program is then later mentioned again in a summary as to how it would be used to fund California’s expansion of its “Working Families Tax Credit”.
What is unclear is whether California will conform to the Federal law exactly, or whether they will add additional “strings” for Opportunity Zone investors. This is made unclear by the text in Newsom’s Proposed Budget when it states that the benefits will be provided for Opportunity Zone investors who invest in green technology or affordable housing. How the California program will shake out will be determined in the near future, and the team here at RevOZ will be paying close attention for every step along the way.