California’s proposed exit tax has raised concerns among high-net-worth individuals, entrepreneurs, and retirees alike. As more people and businesses consider leaving California, understanding the potential tax consequences is essential. This guide provides a direct explanation of the California exit tax, its impact, and how to stay tax compliant when exiting the state.
Is There a California Exit Tax?
As of now, there is no officially enacted California exit tax. However, an assembly bill introduced in California’s legislature proposes an exit tax on high-net-worth individuals who have significant unrealized capital gains and who choose to relocate.
This proposed California exit tax is part of a broader California wealth tax proposal. If passed, it would affect California residents who have lived in the state for at least six of the last ten years and who have a worldwide net worth exceeding $30 million—or $15 million for married taxpayers filing separately.
How Would the Exit Tax Work?
The exit tax applies to individuals who meet certain thresholds, focusing on their fair market value of assets, including real estate, investments, and other financial ties. The exit tax rate would be 0.4% annually on net worth exceeding the specified limit.
Key Components:
- Capital gains and unrealized capital gains during residency would be subject to California tax.
- The franchise tax board would enforce compliance, reviewing legal documents, account statements, and business ties.
- Capital gains tax regulations would apply if assets appreciated during the period of California residency, even if sold after leaving.
This exit tax ensures that taxpayers cannot simply avoid paying taxes by relocating before realizing large gains.
Why Is the California Exit Tax Being Proposed?
The goal of the California exit tax is to prevent businesses leaving California and high earners from evading California taxes on wealth built within the state. It also supports infrastructure support and helps offset less money from lost taxpayers. The exit tax is part of a larger California wealth tax discussion aimed at funding public services.
What Income Types Are Affected?
- Capital gains (realized or unrealized)
- California sourced income
- Real estate located in the state
- Annual income generated from California property or business operations
Those with earned capital gains, rental income from California real estate, or income from in state activities may still be required to pay California taxes.
How Is Residency Determined?
Your residency status is key. The franchise tax board looks at factors such as:
- Where you maintain a primary residence
- Whether you hold a California driver’s license
- Participation in California sources of income
- Retention of California property
- Presence of financial ties and business ties
Partial year residents and married taxpayers filing separately must also comply with tax return obligations for the tax year in which they resided in California.
How Can You Prepare Before Leaving California?
1. Consult a Tax Professional
A qualified tax professional can help ensure you’re tax compliant and understand the full scope of your tax obligations.
2. Establish Residency Elsewhere
Ensure your move is permanent by getting a new driver’s license, selling your California property, and cutting California ties.
3. Track Asset Valuations
Understand the fair market value of your holdings. Selling assets after leaving may still trigger capital gains taxes if tied to California residency.
Are There Any Tax Breaks or Incentives?
There are few tax breaks when it comes to leaving California. However, financial incentives may exist in your new state. Still, federal law allows California to tax non-residents on California sourced income. Always review your legal documents, property holdings, and account statements with a tax professional.
Exit Planning Considerations
Before relocating:
- Assess capital gains to avoid being taxed at the wrong tax year
- Close business ties with California
- Monitor for any changes to the assembly bill or future tax proposals
- Avoid future ongoing tax obligations by separating California sources
For high-net-worth individuals, the one time tax on exit may pale in comparison to the larger California wealth tax discussions ahead.
