Does California tax my home sale after I move out of state?
A common surprise for people leaving LA: moving away generally doesn't take a California home sale out of California's reach. Here's the general background to discuss with your CPA.
This is one of the most common questions from people planning to leave LA, and it's worth understanding before you set a move date. The short version of the general rule: California generally treats gain from selling California real estate as California-source income, which it can tax even if the seller lives somewhere else by the time of the sale. What that means for any particular person depends on their facts, so treat everything below as background for a conversation with a CPA.
Why moving first usually doesn't change it
Some people assume that if they move to a state without an income tax and then sell their LA home, the gain escapes California tax. In general, that isn't how it works. California taxes nonresidents on income from California sources, and real property located in California is a California source.
The federal exclusion still matters
Many sellers can exclude part or all of their gain under federal law (IRC Section 121): up to $250,000 for single filers and up to $500,000 for married couples filing jointly, if they meet the ownership and use tests. California generally follows this exclusion. The question for many long-time LA owners is how much gain is left over after the exclusion.
A married couple moves to Nevada in July, keeps their Sherman Oaks home empty, and sells it in October. Say their gain is $900,000 and they meet the tests for the $500,000 exclusion. In this simplified illustration, the remaining $400,000 of gain would generally still be California-source income even though they had moved. Their actual result would depend on their basis, the timing, their filing status, other income and more.
Withholding at closing
California also generally requires 3⅓% of the sales price to be withheld at closing unless an exemption applies, such as when the home qualifies as the seller's principal residence under Section 121. Escrow handles this using Form 593. Withholding is a prepayment credited on the seller's return, not an extra tax.
Residency is its own question
Separately from the home sale, the Franchise Tax Board looks at a range of factors to decide when someone actually stopped being a California resident, such as where they spend time, where their family lives, where they're registered to vote and where they keep accounts. The FTB's Publication 1031 lays these out.
Questions to bring to your CPA
- What's our adjusted basis, and how much gain would remain after the Section 121 exclusion?
- Does the order of selling and moving change anything for us?
- Do we qualify for a Form 593 withholding exemption?
- How will part-year returns work for the year we move?
For more background, see our guide to selling your LA home and moving out of state.