The California Trap: State Non-Conformity & Sec. 1045
The California Trap: State Non-Conformity & Sec. 1045
Why “Federal Tax-Free” doesn’t mean “State Tax-Free,” and how to use the Section 1045 Rollover as a bailout.
Executive Summary
- Non-Conformity Risk: While federal tax is 0%, states like California, New Jersey, and Pennsylvania do NOT conform to Section 1202, taxing gains fully.
- The Escape Hatch (Sec. 1045): If you sell QSBS held for less than 5 years (but >6 months), you can roll proceeds into new QSBS within 60 days to defer tax.
- Liquidity Trap: In non-conforming states, you must reserve cash for state taxes (~13-14%) even on a “tax-free” exit.
The 60-Day Hard Limit
For a Section 1045 Rollover, you strictly have 60 days from the sale date to close on the new qualified stock. There are virtually no extensions. Missing this window triggers immediate taxation.
Mechanic: The Geography of Tax
14.4%
Max CA Rate
60 Days
Rollover Window
>6 Mo.
Min Holding
Deferral
Sec. 1045
Simulation: The California Drag ($10M Gain Scenario)
Net Outcome in Non-Conforming State (CA)
| State | QSBS Conformity | Tax Impact |
|---|---|---|
| New York (NY) | Conforms (Mostly) | Generally 0% State Tax |
| California (CA) | Non-Conforming | Full State Tax Apply |
| Pennsylvania (PA) | Non-Conforming | Full State Tax Apply |
“Geography determines your alpha. A Silicon Valley exit is legally distinct from an Austin exit, even if the Federal law is identical.”
Essential Resources
INTERNAL
BMT Playbooks