The federal opportunity zone program (26 U.S.C. §1400Z et seq., the OZ Program) provides tax benefits to encourage private investment in economically distressed areas. More than 8,700 census tracts, located in every state, Washington, D.C. and five U.S. territories, were designated as opportunity zones. Proponents hoped that investments in these communities would spur economic development and job creation in needy communities. Many states and localities, including New York City and New York state, aligned their tax codes with the incentives provided under the OZ Program.

However, critics have noted that some projects have failed to generate the social benefits promised by the OZ Program. Legislators in New York have removed some of the benefits of the OZ Program for residents of New York and some non-residents with gains from New York property. This article gives a brief overview of the benefits provided through the OZ Program and how these benefits were incorporated into New York's tax code, and then describes how new legislation will strip some of these benefits for purposes of New York state and New York City taxes, while retaining others.

OZ Program Tax Benefits

Broadly speaking, the OZ Program provides taxpayers who invest qualifying gains in an opportunity zone and hold their investment for at least 10 years with three benefits. First, under 26 U.S.C. §§1400Z-2(a) and (b)(1), the recognition of the qualifying gains is deferred until Dec. 31, 2026 (the Deferral Benefit). Second, pursuant to 26 U.S.C. §§1400Z-2(a) and (b)(2)(B), as of this year, the amount of gain subject to tax is reduced by 10% (the Reduction Benefit). No Reduction Benefit is available for investments made after 2021.