A Mesilla Valley pecan grower and a Hobbs family living on Permian royalties tend to ask the same first question: will there be a New Mexico estate tax when one of us dies? For nearly every family the answer is no, and the federal picture improved on January 1, 2026, when the basic exclusion amount in 26 U.S.C. § 2010(c)(3) rose to $15,000,000 per person.
The bigger New Mexico story is an income tax rule. Because this is a community property state, a married couple’s community assets can take a fresh market-value basis on both halves at the first death.
What did the 2025 tax law change about the federal estate tax exemption?
Section 70106 of Public Law 119-21, signed July 4, 2025 and commonly called the One Big Beautiful Bill Act, set § 2010(c)(3)(A) at $15,000,000 for estates of decedents dying and gifts made after December 31, 2025. For deaths after 2026 the figure is indexed from a 2025 base and rounded to the nearest $10,000. Rev. Proc. 2025-32 confirms the 2026 amount; the 2027 amount had not been published when this post was written.
The top rate in § 2001(c) stays at 40 percent, and the generation-skipping transfer exemption under § 2631(c) tracks the basic exclusion. The 2017 increase carried a built-in end date after 2025; the new text has none. If Congress later cuts it, Treas. Reg. § 20.2010-1(c) keeps gifts already sheltered by the higher exclusion from being pulled back into tax at death.
Is there a New Mexico estate tax or inheritance tax?
The Estate Tax Act remains at NMSA 1978, §§ 7-7-1 through 7-7-12, but it is a pick-up tax with nothing to pick up. Section 7-7-3 imposes a tax “in an amount equal to the federal credit,” which § 7-7-2 defines as the maximum credit for state death taxes under § 2011. For decedents dying after 2004, Congress swapped that credit for a deduction in § 2058, and it repealed § 2011 in 2014. No credit means the New Mexico estate tax computes to zero.
The Taxation and Revenue Department’s estate and fiduciary page says the estate tax was phased out as of January 1, 2005 and that New Mexico imposes no inheritance tax. It still asks any estate filing a federal Form 706 to file Form RPD-41058 too, and then issues a certificate of no tax due. No New Mexico gift tax was located on review.
Why does New Mexico community property get a step-up on both halves?
Under 26 U.S.C. § 1014(a), property acquired from a decedent takes its fair market value at death as basis. That covers the decedent’s half. Section 1014(b)(6) adds “the surviving spouse’s one-half share of community property,” provided at least half of the whole community interest was includible in the decedent’s gross estate. The entire asset resets. In a common-law state, a spousal joint tenancy is a “qualified joint interest,” and § 2040(b) puts only half in the estate, so only half steps up.
Character is a New Mexico law question. NMSA 1978, § 40-3-8 makes property acquired before marriage, or “by gift, bequest, devise or descent,” separate, and presumes that a deed to spouses as joint tenants holds community property. Section 40-3-12 presumes property acquired during marriage is community. A ranch one spouse inherited is separate, so it steps up only when that spouse dies. Commingling can blur the line, and the firm works alongside New Mexico-licensed counsel on characterization. Also watch § 1014(e): appreciated property given to a spouse who dies within a year, and that passes back to the giver, keeps its old basis.
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What does the double step-up save a Las Cruces farm family?
Assume a Las Cruces couple with $11,000,000 of community property: a pecan farm worth $5,000,000 with a $1,200,000 basis, a $3,500,000 brokerage account with a $1,500,000 basis, and $2,500,000 in IRAs. The husband separately owns Eddy County minerals inherited from his father, worth $2,000,000 with a $600,000 basis. All figures are hypothetical.
He dies in 2027 and leaves everything to his wife. His $7,500,000 gross estate is half the community plus the minerals; the marital deduction in § 2056 brings the taxable estate to zero. Both halves of the farm and the account step up, and the minerals step up because they were entirely his. The IRAs do not: § 1014(c) excludes income in respect of a decedent, and her withdrawals are ordinary income under § 691.
Selling the farm and the account at those values, she reports no gain. Put the same family in a common-law state with both assets in joint tenancy and the sales produce $2,900,000 of gain. At the 20 percent top rate in § 1(h) that is $580,000, or $690,200 if the 3.8 percent tax in § 1411 also applies. A real sale would also sort out depreciation on trees and equipment.
| Asset (hypothetical) | Value at death | Basis after, New Mexico community | Basis after, common-law joint tenancy | Gain avoided |
|---|---|---|---|---|
| Pecan farm | $5,000,000 | $5,000,000 | $3,100,000 | $1,900,000 |
| Brokerage account | $3,500,000 | $3,500,000 | $2,500,000 | $1,000,000 |
| Inherited minerals (separate) | $2,000,000 | $2,000,000 | $2,000,000 | None |
| IRAs | $2,500,000 | No step-up | No step-up | None |
Why file Form 706 when no estate tax is due?
To keep the unused exclusion. Section 2010(c)(4) lets a widow add her late husband’s unused exclusion, called DSUE, to her own, but only if his executor elects it on a timely return under § 2010(c)(5)(A). Treas. Reg. § 20.2010-2(a)(1) makes that return due nine months after death, plus any extension. Executors who were not otherwise required to file can still elect under Rev. Proc. 2022-32 on a complete Form 706 filed by the fifth anniversary of death. In the Las Cruces example, that election would carry his full 2027 exclusion to her. The GST exemption does not port, since § 2631(c) ties it to the basic exclusion only. And § 2010(c)(5)(B) lets the IRS examine the first return to test DSUE even after the assessment period closes.
Which New Mexico families still face a federal estate tax bill?
With portability, a couple can shelter about $30,000,000 before indexing, so exposure sits mostly with larger land and mineral holdings, like a Chaves County dairy or a Lea County royalty family. Los Alamos retirees with large IRAs can owe estate tax and then income tax on the same dollars. For farmland, § 2032A allows valuation at farm use rather than highest and best use, with the 2026 reduction capped at $1,460,000 under Rev. Proc. 2025-32. Qualified-use property must be at least 50 percent of the adjusted gross estate and the land itself at least 25 percent, the family must have owned and materially participated for five of the eight years before death, and recapture applies if heirs sell or stop the use within ten years.
When a closely held business exceeds 35 percent of the adjusted gross estate, § 6166 allows up to five years of interest-only payments and then up to ten installments, with the “2-percent portion” under § 6601(j) keyed to $1,940,000 for 2026. Founders holding stock acquired after July 4, 2025 should also check § 1202, which now excludes 50, 75, or 100 percent of gain after three, four, or five years, with a $75,000,000 gross asset ceiling.
How do lifetime gifts of community property work?
The 2026 annual exclusion under § 2503(b) is $19,000 per recipient, and direct tuition and medical payments fall outside the gift tax under § 2503(e). The Form 709 instructions treat a gift of community property as made half by each spouse, so a $38,000 community check to a Rio Rancho grandchild is $19,000 from each grandparent without a § 2513 split election. Form 709 is due April 15 under § 6075(b), and under § 6501(c)(9) and Treas. Reg. § 301.6501(c)-1(f) tax on an inadequately disclosed gift can be assessed at any time. Gifts keep the donor’s basis under § 1015, so gifting the farm forfeits the step-up. See also the firm’s post on Trump account gifts.
Frequently Asked Questions
Does New Mexico have an estate tax in 2026?
No tax is collected. The Estate Tax Act imposes a tax equal to the federal credit for state death taxes, and that credit ended for deaths after 2004. The Taxation and Revenue Department still asks estates that file a federal Form 706 to file Form RPD-41058 and issues a certificate of no tax due. There is no inheritance tax.
What is the federal estate tax exemption for 2026?
It is $15,000,000 per person under § 2010(c)(3), as amended by Public Law 119-21 and confirmed in Rev. Proc. 2025-32. A married couple that elects portability can shelter up to twice that. The amount is indexed for deaths after 2026, and the top rate remains 40 percent.
Does a New Mexico widow get a step-up on both halves of community property?
Yes, if the asset is community property and at least half of it was included in the deceased spouse’s gross estate. Section 1014(b)(6) treats the survivor’s half as acquired from the decedent. Separate property, such as land one spouse inherited, steps up only when its owner dies.
Do IRAs get a step-up in basis at death?
No. Retirement accounts are income in respect of a decedent, which § 1014(c) excludes from the step-up rule, so beneficiaries pay ordinary income tax on withdrawals. If the estate paid federal estate tax, § 691(c) allows an income tax deduction for the estate tax attributable to those amounts.
Is it too late to elect portability if my spouse died two years ago?
Often not. If the estate was not otherwise required to file, Rev. Proc. 2022-32 allows a late portability election on a complete Form 706 filed by the fifth anniversary of the death, with a required statement at the top of the return. Estates that had to file must meet the regular deadline.
How North Star Law Firm Can Help
North Star Law Firm handles the federal tax side of New Mexico estates and gifts, including portability filings, post-death basis records, and special use valuation and installment elections for farm and ranch estates. See trust and estate tax planning, real estate tax strategy, and retirement accounts.
Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and advises on trust and estate taxation. Heirs selling stepped-up land may want the firm’s post on 1031 exchanges for ranches and mineral interests. On community property characterization and estate documents, the firm works alongside New Mexico-licensed counsel. To review your family’s numbers, contact North Star Law Firm.