Should I Stay or Should I Go? How to Live in California Without Paying for It

I thought the Clash song would be a good title. It rather succinctly states the dilemma faced by those wishing to immigrate to California.

Here’s my premise: You are a wealthy couple from a place where you made your money, but you wish for the California lifestyle and climate in your latter years. Home is sweaty in the summer and cold and bleak in the winter. You hear about Santa Barbara and Montecito from friends who have migrated here. You start with La Jolla and work your way up the coast and when you hit Montecito you go no further. You decide this is where you want to live. Temporarily.

You plunk down millions of dollars for a stately Mediterranean-style estate. You go back and forth to your home base but the more time you spend here the longer you want to stay.

But then you receive a letter from the California Franchise Tax Board (FTB) saying we’re going to tax you. What!? But, you say, you are still a resident back home. You vote there, you pay taxes there, your cars have out-of-state plates, your phone has your home area code, you belong to clubs there. “We’re not California residents, dammit!” 

You then learn that California has the highest tax rate in the nation (14.4% for those earning $1.4M and up). Also, there is no capital gains rate, which means that when you sell the Apple stock you bought 20 years ago, that gain is taxed as ordinary income. Ouch!

You start thinking you made a mistake moving here. Maybe California is not Shangri-la. Maybe your home state with much lower tax rates isn’t so bad. Maybe you should skip California and move to Florida, Texas, Nevada, or Tennessee, which have no income tax.

Or, you could follow several tricky rules by which you might avoid being taxed as a California resident. 

California has guidelines which determine who is and who isn’t defined as a resident for tax purposes. These are residency guidelines, not tax guidelines. If audited, you must prove you are a nonresident. It isn’t an innocent-until-proven-guilty thing. Your tax lawyer will tell you that California residency audits are invasive. Especially if you are wealthy. 

The basic idea is that a person can only have one domicile – the place a person considers “home.” The FTB wants to determine if your home state is really your domicile, or if your domicile is in fact California, which makes you a resident for tax purposes.

FTB Form 1031 offers these guidelines:

– The amount of time spent in California versus time spent outside California. Everyone has heard that if you reside in California for six months or less (183 days total), you are presumed to be a nonresident. First of all, while that is an important factor, it is a rebuttable presumption and there are other factors that could still make you a resident. Second, the calculation isn’t so simple. If you spend 183 days here, three months at your Aspen home, and three months at your New York apartment, isn’t California your domicile? 

To determine where you spend your time, they will look at your phone records showing the origin of your phone calls; credit-card receipts; utility bills, bank statements, and even social-media commentary about how you love California. 

– For those with kids, where the children attend school.

– The location of your principal residence. They will compare the size and value of your residences, and the location of the property. If you sell your house back home and just keep a studio apartment there – and a 5,000-square-foot estate here – it looks to them like California is your home base. 

– Did you file a homeowner’s exemption here or back home?

– Where your driver’s license was issued.

– Where your vehicles are registered.

– Where you maintain your professional licenses.

– Where you are registered to vote.

– Where you file your tax returns.

– The locations of banks where you maintain accounts.

– The origination points of your financial transactions.

– The locations of your doctors, dentists, accountants, and attorneys.

-The locations of your primary social ties such as your place of worship, professional associations, and social and country clubs. Yes, you can belong to clubs in California, but, again, that is “a” factor.

-Are you involved in a hands-on business in California (not just a passive investment here)? This is a significant factor.

– The contact address you use for mail and correspondence.

The FTB has a special audit division to determine residency. It isn’t just one thing that will make you a California resident, rather they have a “closest connection” test. In an audit they create a ledger with one column of factors that would indicate residency in California, and one for your home state. These are weighted and whichever is “closer” is your domicile. 

If you believe they will never catch you, they have their ways. Usually, it’s because you have reported something to the FTB. Something that you didn’t realize would be reported to them. If you receive income from a California source, like a K-1, or a 1099 on interest received from a California bank, you need to file a nonresident tax return (540NR) requiring you to attach your IRS return, which has loads of information about you. If your income is high, they will take more interest in you, especially if there were large sales of assets (stocks, real estate, private equity).

So, Mr. and Mrs. Non-California Resident, if you wish to avoid being taxed as a California resident, you’ve got to carefully follow the guidelines. This stuff is complicated, so take this information with a grain of salt. Like I said, get advice from a qualified lawyer or tax adviser. 

Other than that: Welcome to California!

Caveat: The information provided is not to be construed as legal or tax advice. Neither the author nor the Montecito Journal Media Group, LLC., are qualified or licensed to offer legal or tax advice. No reader of this article should act on the basis of any information in this article without seeking qualified legal or tax advice.