A software founder in Los Alamos and her husband put $200,000 of joint savings into her startup’s C corporation stock in 2021. A buyer is now circling at $28,000,000 for their shares, with a closing likely in 2027. Their CPA says most of the gain may be tax-free under Section 1202. Their estate planner wants to move shares into trusts for their two children first, so the family can claim more than one exclusion.
That can work. For a New Mexico couple, though, it runs into rules national QSBS commentary rarely mentions, because community-funded stock belongs to both spouses from day one.
What did the OBBBA change about qualified small business stock in New Mexico?
Section 1202 lets a noncorporate shareholder exclude gain on stock bought at original issue from a domestic C corporation that passed a gross assets test and ran a qualifying active business. Congress rewrote it in § 70431 of Pub. L. 119-21, signed July 4, 2025, leaving two generations of stock sorted by acquisition date.
Stock acquired after September 27, 2010 and through July 4, 2025, like the Los Alamos shares, kept its terms. Under 26 U.S.C. § 1202(a)(4), all of the gain is excluded after a holding period of more than five years. The per-issuer cap is the greater of $10,000,000 or ten times the basis of the shares sold that year, and the company needed $50,000,000 or less of aggregate gross assets at issuance.
Newer stock phases in under § 1202(a)(5): half excluded after three years, 75 percent after four, all after five. Its cap is $15,000,000, indexed after 2026, and the asset ceiling is $75,000,000. The unexcluded slice of a partial exclusion is “section 1202 gain” under 26 U.S.C. § 1(h)(7), taxed at up to 28 percent. Gain above the dollar cap is regular long-term gain at 20 percent plus the 3.8 percent tax in 26 U.S.C. § 1411. The AMT preference in 26 U.S.C. § 57(a)(7) now reaches only stock acquired by September 27, 2010.
Is the QSBS cap per spouse or per couple with New Mexico community property?
Property either spouse acquires during marriage is community property unless it fits a separate category, and New Mexico presumes it is community (NMSA 1978, § 40-3-8; § 40-3-12). Shares bought from joint savings are half hers and half his.
Does each half carry a cap? The text says no. Section 1202(b)(3)(A) gives a married person filing separately half the cap, and § 1202(b)(3)(B) splits joint-return gain “equally between the spouses” for later years. That describes one cap per couple, and separate filing doubles nothing. I found no regulation, ruling, or legislative history allowing two full caps on a joint return, and no Tax Court or Tenth Circuit decision. Some preparers claim two with a disclosure statement. I would plan around one.
Can one New Mexico spouse give away community property stock alone?
The joinder statute, NMSA 1978, § 40-3-13, covers community real estate, not stock. Under § 40-3-14, either spouse may manage and dispose of community personal property, but a spouse named alone on the ownership document controls it, and names joined by “and” need both signatures. The founder may have the power to sign by herself. Whether a one-spouse gift of community assets holds up is a state-law question for New Mexico counsel. My practice is to have both spouses sign.
The Form 709 instructions treat a gift of community property as made half by each spouse, and each spouse files a return. The split-gift election in 26 U.S.C. § 2513 exists to treat one spouse’s gift as half the other’s; community property already works that way. For 2026 each spouse has a $15,000,000 basic exclusion and a $19,000 annual exclusion per recipient (Rev. Proc. 2025-32).
How does Section 1202 gift stacking work with a trust for each child?
Shares that change hands usually lose QSBS status. Section 1202(h) carves out gifts, transfers at death, and some partnership distributions: the recipient steps into the donor’s manner of acquisition and the donor’s holding time. Carryover basis under 26 U.S.C. § 1015(a) and tacking under 26 U.S.C. § 1223(2) agree. The Code never defines “gift” here.
The cap is per taxpayer. A child gets one, and so does a trust that files its own returns. Because the recipient inherits the 2021 acquisition date, its cap is $10,000,000, not $15,000,000.
That trust must be non-grantor. A revocable trust or a grantor trust built to be disregarded drops out for income tax: 26 U.S.C. § 671 puts its income on the grantor’s return, and the IRS’s position in Rev. Rul. 85-13 is that the grantor owns its assets for income tax purposes. Shares there use the couple’s cap. Selling shares to such a trust for a note adds nothing, and no authority says whether switching off grantor status later qualifies under § 1202(h).
The main limit is Treas. Reg. § 1.643(f)-1, proposed in August 2018 and finalized by T.D. 9847 in February 2019. Trusts with substantially the same grantors and primary beneficiaries are combined when a principal purpose is avoiding federal income tax, and spouses count as one person. Both spouses are grantors of every community property trust, so beneficiaries carry the weight. One trust per child, with that child as primary beneficiary, is the conventional design.
Treasury’s 2026-2027 Priority Guidance Plan, released September 29, 2026, lists § 1202 regulations as item 32, and a senior official reportedly said in May that Treasury does not like stacking. Nothing has issued. A trust sited here is governed by New Mexico’s Uniform Trust Code, NMSA 1978, ch. 46A.
What does QSBS gift stacking save a Los Alamos family, federal and New Mexico?
Illustrative only; every figure is hypothetical. Assume the shares qualify, issued in March 2021, with a mid-2027 closing.
Without gifts, the gain is $27,800,000. Ten times basis is $2,000,000, so the $10,000,000 cap controls, leaving $17,800,000 taxable on the one-cap reading. At 23.8 percent, federal tax is about $4,236,400.
New Mexico starts from federal adjusted gross income under NMSA 1978, § 7-2-2, so the excluded $10,000,000 never reaches the state return, and nothing there adds it back. The New Mexico capital gains deduction in § 7-2-34, narrowed for tax years starting in 2025, is the greater of $2,500 or 40 percent of up to $1,000,000 of net capital gain “from the sale of a business” allocated or apportioned to New Mexico. Whether a stock sale counts is unstated. At the 5.9 percent top rate in § 7-2-7, state tax is about $1,026,600 with a $400,000 deduction, or about $1,050,000 without it.
Now the gift version. This November, well before any letter of intent, the couple gives one-third of the shares to each of two non-grantor trusts, one per child, and keeps a third. Each block carries $66,667 of basis and about $9,266,667 of gain, inside each holder’s $10,000,000 cap. All $27,800,000 is excluded. Federal tax is zero, and since a trust’s New Mexico base income starts from federal taxable income, the state collects nothing. The saving is about $5.26 million.
The cost is exclusion. If an appraisal made before any offer, with minority and marketability discounts, puts the gifted shares at $10,000,000, each spouse makes a $5,000,000 gift and keeps $10,000,000 of basic exclusion. Timing matters too: a gift after a sale is effectively locked in invites an assignment-of-income challenge, which is why I want trusts funded long before a term sheet.
When does holding QSBS until death beat gifting it?
Gifted shares keep the $200,000 basis. Shares the couple still owns at the first death do not. Under 26 U.S.C. § 1014(b)(6), the survivor’s half of community property also takes a fair market value basis if at least half the community interest is in the decedent’s gross estate. In a common law state only the decedent’s share resets. Here the whole block does, and the gain vanishes without using any cap.
With a sale in sight, gifting usually wins, because a step-up after closing is worth nothing. A family planning to hold for decades, or facing a serious illness, may do better holding, and with $15,000,000 of exclusion per spouse many couples owe no federal estate tax. The firm’s post on New Mexico estate tax and the community property step-up covers that side.
| Holder at sale | Own § 1202 cap? | Basis | Main risk |
|---|---|---|---|
| Couple, joint return | One on the text; two untested | Original $200,000 | Claiming two caps without authority |
| Spouses filing separately | Half cap each | Original | No gain over joint filing |
| Revocable or grantor trust | No, shares the couple’s | Original | Assuming it multiplies the exclusion |
| Non-grantor trust for one child | Yes, $10,000,000 for 2021 stock | Carryover | Multiple-trust rule; late gifts |
| Couple holding to death | Rarely matters | Full step-up on community stock | No liquidity before death |
Frequently Asked Questions
Can a QSBS gift to a trust in New Mexico keep the exclusion?
Yes, if it is a true gift and the trust is a non-grantor trust. The trust inherits the founder’s acquisition date and holding period. A grantor trust adds no cap.
Do New Mexico spouses get two QSBS caps because the stock is community property?
Not on the statute’s text, which halves the cap for separate filers and splits joint-return gain equally. I located no IRS guidance or court decision approving two caps on a joint return.
Does New Mexico tax gain that Section 1202 excludes?
No. New Mexico starts from federal adjusted gross income for individuals and federal taxable income for trusts, with no add-back for excluded QSBS gain. Gain above the cap is taxed at up to 5.9 percent.
Do both spouses file a gift tax return for a gift of community property stock?
Yes. The IRS treats the gift as half from each spouse, so each files Form 709. No split-gift election is needed.
Is the IRS going to stop QSBS stacking?
Possibly. Treasury’s September 2026 plan lists new § 1202 regulations without a timetable. Until something issues, the multiple-trust regulation is the main limit.
How North Star Law Firm Can Help
North Star Law Firm advises New Mexico founders on business sale tax structuring and on trust and estate tax planning when shares move into trusts, and handles IRS audit defense if an exclusion is later questioned.
Phillip Zagotti, JD/CPA, represents taxpayers before the IRS and the U.S. Tax Court and is admitted to the U.S. District Court and Bankruptcy Court for the District of New Mexico. The firm works alongside New Mexico-licensed counsel on state-law questions. To test a QSBS gift plan before an exit is locked in, contact North Star Law Firm.