New York’s recently enacted 2022 Fiscal Budget has significant implications for investors with capital gains realized in New York who hope to take advantage of Qualified Opportunity Zone (“QOZ”) tax benefits.
The Tax Cuts and Jobs Act of 2017 created QOZs to offer sizeable tax breaks to investors who make qualified long-term investments that have the potential to promote economic growth in zones designated for economic development. The tax benefits can be summarized as follows:
- Tax Deferral: Investors can defer payment of capital gains taxes on realized investments until as late as December 31, 2026, if those investors elect to reinvest their realized gains in QOZ funds.
- Tax Reduction: There is a step-up in basis, up to 10%, applied to the original capital gain, resulting in a corresponding percentage reduction in capital gains tax due (as long as the investment is made by the end of 2021 and held past the end of 2026).
- Tax Elimination: No tax will be due from profit generated by QOZ investments if the investments are held for at least 10 years.
However, New York’s 2022 Fiscal Budget includes provisions to decouple from QOZ deferral and reduction benefits, effective for taxable years beginning on or after January 1, 2021. This means that gains that would otherwise be included in income in 2020 are still eligible for the deferral and reduction benefits in New York, even if those gains have not yet been invested in a QOZ fund such as our Cresset Diversified QOZ Fund II (the “Fund”).
To maximize the potential QOZ tax benefits, investors with New York-sourced 2020 capital gains should consider investing in a QOZ fund before their time to invest lapses.
Our Fund invests alongside seasoned development partners in institutional-quality, core real estate assets located in high-growth, urban markets benefiting from positive job growth and significant net migration through the Covid-19 pandemic. The Fund’s portfolio is currently comprised of three projects under contract and one project under letter of intent, with several others identified in the Fund’s pipeline. The Fund seeks to follow the same investment strategy as the Cresset Diversified QOZ Fund I, which closed in Q2 2020 with $465 million in commitments.