QOF / Opportunity zone investing as a CA resident --- worth it?

[Jay G.]

Here's the summary...

- CALIFORNIA RESIDENT, not moving any time soon.
- Assume $1,000,000 short-term capital gain  (with other income, so max-tax)

Note that before the gain, I was already planning to buy a couple commerical properties (1 in state, 1 out of state), but then due to the gain, I wound up learning about Opportunity Zone investing, QOF/QOZB, etc. -- unfortunately the 2 properties I wanted to buyer are OUTSIDE of their respective states OZ's.

OPTION 1 - PAY ALL THE TAX NOW:
- "paying the tax" as income would be about $450,000 combined to CA / FED (leaving $550k free/clear from that gain)
- Done. Look how easy option 1 was. Tempting.

OPTION 2 - OPPORTUNITY ZONE INVESTING from CA: 
If I understand OZ/QOF correctly, CA is one of the worst states for OZ investors to live and invest in? In my nationwide property searches, seems that CA a large share of the nations OZ land tracts and properties in need of assistance... a little ironic, but moving on.

So if I were to go the OZ route with the example 1M gain it would look something like this:

B/C CA is "Non-conforming" to OZ, PAY THE CA PORTION OF THE TAX IMMEDIATELY -- ABOUT $105k   (i.e. pay by 04/15/2022)

- TAXES ON REMAINING GAIN DUE TO IRS about $345K.
- Those taxes will be due 12/31/2026 (pay by 04/15/2027?)
- Assuming the remaining gain ($1M - $105K = $895K) gets into *my* QOF before 12/31/2021 -- I get 10% off the gain.
- But wait... I just gave $105K to CA. So I only have $895K to QOF.  Because of that issue.. not sure after 5 years what I get 10% off of (original gain? or what I was able to put in the QOF). Confusing.
- Now... form 2 member QOF LLC
      ~$1000 one time setup
      pay minimum+ CA tax on it for 10 years ($8000+)
      QOF LLC tax prep 10 years ($5000)

- Next form 2 member QOZB for each property LLC
     ~$1000 one time setup
     pay minimum+ CA tax on it for 10 years ($8000+)
     QOF LLC tax prep 10 years ($5000)

- IF we find OZ property OUT OF STATE we like, will need QOZB LLC in that state (epsecially if doing USDA B&I or something) so...
     $200 one time
     no minimum state LLC tax (usually)
     tax prep 10 years ($5000) 

- and *probably* ANOTHER QOZB Foreign Reg LLC for the out of state QOZB LLC since we would still be living/managing things from CA. So....
     QOZB CA FR LLC ~$1000 one time
     pay minimum+ CA tax on it for 10 years ($8000+)
     QOF LLC tax prep 10 years ($5000)

It's at this point that I stopped looking into it as a CA resident. :( 

It would seem like if you're going to do CA OZ investing *FROM* California, seems like investing in OZs out of state really isn't an ideal option because of the potential for CA to come back later and say "You should have had a CA FReg QOZB LLC!... pay fines and fees." And even investing in OZ properties in non-cofrming CA from CA, is annoying since you have to pay the gains tax up front, and it's TBD (for now... most likely NO?) that they'll give you the final step-up after improving and holding for 10 years.

I guess that's the end of my question.

Would love to hear from successfull CA based Opportunity Zone investors. 

*ps I know LLC setup isn't really $1k, but since OZ slightly more tricky I leave some buffer for legal/tax consulting, QOF/OZ compliant Op agreements, etc. in the "setup" costs.