I Own a House in Palm Springs, California, But I Really Live in Illinois. How Do I Avoid Being Deemed a California Resident (Part 2)?

September 6, 2012
By Sanger & Manes, LLP on September 6, 2012 5:08 PM |

So we're on to Part 2 on this topic. Here, we're talking about a US citizen who owns a California home (maybe in Palm Springs), but lives in Illinois.

Presumptions Generally

Let's review the FTB's presumptions on time spent in California. If you spend more than 9 months (in a calendar year) in California- you are presumed to be a California resident that year (but you can rebut it by going to the checklist). You can find this presumption in Cal Rev. & Tax Code §17016. There is also a lesser presumption (found in regulations as opposed to the Cal Rev and Tax Code) which provides if you are present in California less than 6 months a year, you are presumed to not be a California resident. This "lesser" presumption is found at 18 Cal. Code of Regs. §17014(b). I consdier it a lesser presumption since it comes from the Cal tax regs and not the Code (unlike the 9 month presumption). There is no presumption if you are present in California between 6 months and 9 months. But in all events, you still must go back and review the checklist.

Make Sure to RE-Review the Checklist

We must re-review the checklist of items the FTB looks at from Part 1 of this topic (e.g., location of your spouse/RDP and children; location of your principal residence; where your vehicles are registered; where you maintain your professional licenses, etc.). The FTB may still deem the American from another state (Illinois) a California resident if they have enough checks in the wrong category, even though that person does not spend more than 6 months a year in California.

What Does it Mean For the American From Another State to Be Deemed a Resident of California?

It's significant. It means that California will tax the individual up to 9.3% of the income they earn anywhere in the world.

What Taxes Must the American Who Is Not Deemed a Resident of California Still Pay to California?

Here were talking about owing tax to California solely on California source income. So what are we talking about here?

Gain From the Sale of California Real Property- A big one. You sell your California vacation house, you owe tax in California. Count on 9.3% of the gain on the property (i.e, buy for $300,000, sell for $500,000, its 9.3% x $200,000= $18,600 in tax to the state of California). You're still going to owe tax to the IRS on top of this. By the way, upon the sale of your house, the buyer must withhold from you (the out of state seller, or the in state seller for that matter) either: 3.3% of gross sales price ($500,000 x 3.3%= $16,500); or 9.3% of the gain ($18,600), and send it in directly to the FTB. You, as the seller, can choose the withholding amount (you should choose the lower amount).

We'll talk about the tax on other sources of California income in Part 3 of the series.