Hotel California: Can You Really Never Leave?

California imposes one of the highest state income tax rates in the nation. This coupled with more people working remotely have led residents to consider leaving the state. Those states without state income tax such as Florida, Texas, and Nevada have become popular destinations. Moving out of California, however, requires careful planning and navigation through its complex tax rules.

It’s All About Intent

The classification of whether you are a California resident is dependent on facts and circumstances. Specifically, the reason you are in the state will determine if it is temporary or transitory. This goes beyond your subjective state of mind and looks to objective indications as to whether you are in California on a permanent basis. 

I’m Going Back to Cali, Cali, Cali

If you have multiple homes in different states, there is no clear-cut rule for the number of days you will reside in California to be considered a resident. If you spend nine months of the year in California you’re presumed to be a resident, but this is not a guarantee and may be overcome with evidence showing the contrary.

There is also presumption of non-residency, and it does not use the same nine-month period. The state considers you a non-resident if you spend six months or less in California and have domicile elsewhere. Like the presumption of residency, this too may be rebuttable.

Factors to Consider

The Franchise Tax Board (FTB), California’s agency tasked with collecting taxes, outlines 13 factors that may determine your residency in its publication 1031. It is important to note that this list is not comprehensive, and each case is examined on a case-by-case basis. 

1. The amount of time you spend in California versus other locations.

2. The location of your spouse or registered domestic partner and children.

3. The location of your principal residence.

4. The state where your driver’s license is issued

5. The state where your vehicles are registered.

6. The state where you maintain professional licenses.

7. The state where you are registered to vote and have a history of voting.

8. The location of banks where you maintain accounts.

9. The origination point of your financial transactions.

10. The location of your medical professionals and other health care providers.

11. The location of your social ties, such as place of worship and country clubs.

12. The location of your real property and investments.

13. The permanence of your work assignments in California.

Taxation of Non-Californians

Even if you are successful in changing residency, you may not be in the clear. Non-residents are taxed on any income that is derived from California sources. Part-time residents are taxed on all income while they are California residents and California-source income while they are non-residents.

Understanding what income you may have even if you leave California is a key step in analyzing your rationale for moving.

Case Study: Proving Genuine Intent

In California’s Board of Equalization (BOE) decision in Appeals of Stephen D. Bragg¹, a taxpayer moved from California to Arizona to fulfill a life-long dream in becoming a rancher.

Though he was ultimately successful in persuading the BOE that he was no longer a California resident, subjective intent was not enough and actual evidence of his intent was necessary. This case is often referred to for the instructive, but not exhaustive, factors it established in examining a taxpayer’s residency. 

In the taxpayer’s favor was that he physically moved to Arizona and hardly returned to California. He also dedicated most of his time, sometimes 70 to 90 hours a week, to his ranching endeavor. The FTB contended, however, that his ongoing connections with California—such as maintaining bank accounts, purchasing real estate, continuing to receive professional services, claiming a property tax exemption, operating a business, and living apart from his family—were enough to make him a taxpaying resident of California.

In the end, it was thoughtful planning by the taxpayer that contributed to winning his appeal. The BOE reasoned that the taxpayer laid the groundwork for a permanent move. By selling his family crane business in California, purchasing a ranch in Arizona and then operating the ranch without returning to California, there was enough evidence to substantiate the taxpayer’s genuine intent.

Action Items to Take Before Your Move

Should you decide that moving better aligns with your personal financial goal and lifestyle, there are action items to consider in preparation for your transition.

• Make a clear decision on your new destination
• Notify your lawyer and tax adviser
• Review FTB Publication 1031 and satisfy as many steps as possible
• Keep excellent records
• Update estate plan in your new state

We’re Here for You

The process of relocating from California may prove to be challenging, especially for those spending time in multiple states. To successfully change domicile from California, a taxpayer must leave the state and intend to remain in their new location permanently. We can help put a plan in place to navigate the risks associated with making a move.