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The rise of remote work has reshaped career paths and lifestyles, allowing professionals greater flexibility in where they choose to live. While many have returned to office settings, remote work has opened new doors for relocation—giving professionals the flexibility to reduce their tax burden, pursue career growth, or embrace a digital nomad lifestyle. However, crossing state lines doesn’t necessarily mean escaping California’s tax reach.
In response to the increasing number of residents leaving California, the Franchise Tax Board (FTB) has ramped up residency audits, scrutinizing individuals who maintain financial or professional ties to the state. Without a well-documented plan to establish residency elsewhere, former Californians may still find themselves subject to state taxes, making it essential to take proactive steps to sever residency ties properly.
FTB Residency Audits: The State’s Way of Reeling You Back In
A California residency audit determines if you truly left the state or if California can still tax you. The FTB examines your financial ties, business activities, and time spent in the state to decide whether you owe California income tax.
How is Residency Determined?
Determining California residency is not based on a single factor—the Franchise Tax Board (FTB) evaluates multiple aspects of your life to decide whether you are still a resident for tax purposes. Key considerations include:
Where You Live – Your primary home location is a major factor. Maintaining a residence in California can indicate ongoing residency, even if you spend significant time elsewhere.
Business & Employment Ties – Owning, operating, or maintaining control over a California-based business, serving on a board, or receiving income tied to California can establish tax residency.
Family & Financial Connections – If your spouse, children, or dependents remain in California, or if you continue to bank, vote, or hold professional licenses in the state, California may still consider you a resident. California’s community property laws can also create unexpected tax liabilities for married couples. If one spouse remains a California resident, they may be required to report half of the other spouse’s income—even if earned outside the state. This means that simply relocating one spouse may not be enough to eliminate California tax obligations.
Time Spent in California – The more time you spend in the state compared to elsewhere, the more likely California will assert residency. Even frequent visits could be scrutinized.
Example: A tech consultant who moved to Texas but still manages a California LLC and maintains a California mailing address could be flagged by the FTB as a California resident. Even if they spend the majority of their time outside the state, maintaining business ties and financial connections could trigger an audit.
Even nonresidents who never set foot in the state have been subject to California taxation due to income sources linked to the state. California’s broad tax rules make it essential to carefully document your residency transition to avoid costly audits and disputes.
Ultimately, if you maintain significant ties to California, the FTB may still claim you as a resident for tax purposes—even after moving.
How to Avoid the Tax Trap by Properly Documenting Your Residency
It’s critical to establish clear residency elsewhere to avoid the risk of continued California taxation. The FTB applies a “closest connections” test, considering factors such as where a taxpayer owns property, receives mail, banks, and holds professional affiliations. To avoid unintended tax liabilities, take proactive steps to establish tax residency in a new state or country, including:
Using a residency affidavit to affirm your intent to reside elsewhere.
Obtaining a new driver’s license and registering to vote.
Establishing a permanent home outside of California.
Relocating professional licenses and business registrations.
Severing unnecessary financial ties to California.
Limiting time spent in the state each year.
Updating estate planning documents to reflect your new domicile.
Structuring businesses outside of California to avoid continued tax obligations.
Capital Gains Tax Implications of Relocating Out of California
Beyond residency status, another major tax consideration when leaving California is how your move impacts capital gains taxes—especially if you're selling a business, home, or investments tied to the state.
California’s “Source-Based” Taxation
Unlike some states that tax capital gains based on residency, California taxes capital gains based on where the income was earned. This means:
If you sell a California-based business, you may still owe California capital gains tax even if you have moved out of state.
If you sell California real estate, the capital gain remains subject to California tax—even if you are no longer a resident.
Selling Your California Home
If you sell your primary residence, you may qualify for the federal and state capital gains exclusion if you meet the ownership and use requirements (i.e., you lived in the home for at least two of the last five years before selling).
$250,000 tax-free gain for single filers.
$500,000 tax-free gain for married couples filing jointly.
Any gain beyond these amounts is taxed as ordinary income under California’s tax brackets, which reach up to 14.4% as of 2025 for high-income earners.
Additionally, California requires real estate withholding at 3.33% of the gross sale price for both residents and nonresidents as an advance payment toward potential capital gains taxes. Sellers will reconcile this when filing their California tax return for that year.
Relocation Timing Strategy
If you own a business in California and plan to sell, moving out of state alone may not be enough to escape California’s capital gains tax. Instead, consider restructuring your business or transitioning operations to another state before selling to reduce tax exposure.
Example: A California resident who moves to Texas and then sells their California-based business may still owe California capital gains tax because the income was sourced from the state. However, if they gradually transition operations, clients, and business nexus to another state before selling, they may reduce or eliminate California’s claim on the sale.
Tax-Saving Strategies for Capital Gains
Sell Before Moving: If your gain exceeds the $250K/$500K exemption, selling while still a California resident won’t eliminate the tax but may help with documentation and reduce the risk of a state tax residency audit.
1031 Exchange (For Rental or Business Real Estate Only): If the home is a rental, business, or investment property, you may defer capital gains taxes by reinvesting proceeds into another like-kind property through a 1031 exchange.
Verify Residency Before Selling: If you move and sell later, ensure your new residency is well-documented to avoid additional scrutiny in a California residency audit.
Equity Compensation and Deferred Income After Leaving California
Another overlooked issue when leaving California is how the state treats equity-based compensation and deferred income. Even after relocating, certain forms of compensation—such as stock options, RSUs, and bonuses—may still be subject to California taxation.
Deferred Compensation and Tax Implications
Deferred compensation—including stock options, RSUs, or bonuses—can affect tax liability long after relocation. California taxes this income based on where the services were performed, meaning compensation for services rendered in California remains taxable by the state, regardless of residency at the time of payment.
California has a history of adjusting tax laws to capture revenue, including retroactive tax changes on certain trusts in 2023. The state’s Controller has even called for federal changes to limit the effectiveness of deferral strategies. Given California’s aggressive stance on taxation, professionals with stock options, RSUs, or deferred bonuses should carefully evaluate their tax exposure before relocating.
Equity Compensation: How Moving Affects Your Taxes
For high-net-worth professionals, equity compensation—including stock options, RSUs, and deferred bonuses—can complicate tax obligations when relocating. California taxes equity-based income based on when and where it was earned, not just when it is received.
Nonstatutory Stock Options (NSOs): Taxable upon exercise. If exercised while a California resident, the entire income is taxable by California. If exercised as a nonresident, California taxes the portion related to services performed within the state.
Incentive Stock Options (ISOs): Taxable if a disqualifying disposition occurs (e.g., selling stock within two years of the grant or one year of exercise).
Restricted Stock Units (RSUs): Taxed at vesting, meaning income may still be taxable in California even if you’ve already moved.
Deferred Bonuses & Severance Pay: Taxed based on where the work was performed rather than where the individual resides when payment is received.
If you also pay taxes on this income in another state, California may allow a credit to prevent double taxation, but eligibility depends on state tax agreements and income sourcing rules.
Given the complexity of California’s taxation on equity compensation and deferred income, consulting a tax professional before relocating is essential to ensure proper tax treatment and avoid unexpected liabilities. For broader financial planning considerations, our team can help you align your relocation strategy with your long-term wealth goals.
Strategic Financial Planning for Your Next Move
At Aspire Planning Associates, we help clients navigate major life transitions, with specialized expertise in relocation planning. Whether you're moving for career opportunities, retirement, or a lifestyle change, we ensure your financial plan aligns with your new residency while minimizing tax risks.
A strategic relocation plan can protect your wealth and prevent costly tax surprises. Call Aspire Planning Associates at (925) 938-2023 today for expert guidance on your next move.
