Lake Oswego in Oregon.
Bradley Hebdon | Istock Unreleased | Getty Images
A version of this article first appeared in CNBC’s Inside Wealth newsletter by Robert Frank, a weekly guide for high-net-worth investors and consumers. Sign up to receive future editions directly to your inbox.
Lawyers for the wealthy told Inside Wealth that a growing number of states are deciding on tax incentives for investors and startup founders, potentially prompting some wealthy residents to decide to relocate.
The One Big Beautiful Bill Act significantly enhanced tax relief for qualified small business stocks, known as QSBS. But some states, including Maine and Oregon, are targeting tax breaks in response to federal funding cuts.
“There are positive and negative implications for the tax system, and I think states need to figure out what makes the most sense for them,” said David Blum, partner and chairman of Ackerman’s national tax practice group. “People looking for a substantial exit may already own multiple homes.”
Blum noted that several billionaires are drawing attention from California as the state billionaire tax proposal gains momentum. google Co-founder Sergey Brin, who has bought mansions in Nevada and Florida, is funding two ballot initiatives aimed at anti-wealth taxes.
The QSBS exemption system, introduced during the Clinton administration, is intended to encourage investment and establishment of small and medium-sized enterprises. The federal carve-out allows investors and founders to reduce capital gains taxes when selling stock acquired directly from a qualified C corporation.
To claim full exemption, you must hold the shares for at least five years. Prior to OBBBA, the maximum capital gains tax exemption was the greater of $10 million or 10 times the original investment basis. OBBBA increased the exclusion to $15 million. The bill also increases the total asset size limit for eligible “small businesses” from $50 million to $75 million.
Last month, Maine and Oregon passed legislation separating them from the federal QSBS exemption. This means that taxpayers will have to pay state income taxes upon exiting the startup. Similar efforts in New York and Washington were unsuccessful. The District of Columbia Legislature voted to dissociate from several provisions of OBBBA, but Congress passed a resolution blocking that move.
Four states already tax QSBS gains: Alabama, Mississippi, Pennsylvania, and most notably California, the nation’s venture capital capital.
Supporters of QSBS reform argue that the system primarily benefits the wealthy. A Treasury Department study found that taxpayers with incomes of $1 million or more accounted for nearly 75% of excluded benefits.
Attorney Steve Osins told Inside Wealth that the QSBS law and other tax proposals targeting the wealthy encourage high-income earners to move to other states.
Tax liability varies depending on the shareholder’s residence when selling their shares, giving customers time to plan. Oshins said some states allow trusts to be used to avoid state income taxes on QSBS. Delaware, Nevada, and Wyoming are popular jurisdictions to establish these trusts.
For example, he said, an Oregon resident could transfer shares to an incomplete nongrantor trust established in a state like Nevada that doesn’t tax trust income. As long as the trust is not administered in Oregon and none of the trustees reside in Oregon, the trust’s capital gains are not subject to Oregon income tax.
But other states, such as Maine, say they have stricter rules. Nongrantor trusts are subject to state income if funded by a Maine resident or created by his or her will, Osins said.
However, the easiest course of action is to move.
“Say a client is looking to hire me and says, ‘I’m going to spend the summer in Florida, so I’m thinking about moving there,'” Osins said. “I say, ‘Let’s wait a few months. Move there. Then let’s build trust.'”
But changing your address is easier said than done, Blum said. To pass discussions with state tax authorities, customers must do more than change their voter registration and spend at least 183 days in another state.
“When you change your place of residence or address, you have to actually move and uproot your life,” he says.
