California Residency Tax Planning
What’s Happening
Rarely has a potential change in tax law affecting so few taxpayers attracted as much attention as California’s 2026 Billionaire Tax Act. By definition, the proposed legislation, which takes the form of a ballot initiative subject to a popular vote, only applies to the rarified demographic of taxpayers with a net worth of a billion dollars or more, who are residents of California in a single tax year. That number is around two hundred and fifty individuals, at most, out of a state population approaching 40 million.
But of course, this proposed tax change reflects deeper political and economic conflicts at a national level, and marks a possible turning point in the Silicon Valley tech ecosystem.
This article doesn’t focus on the politics or tax policies of the BTA, but rather how California residency rules might affect the small number of high net worth individuals who may attempt to plan around it. If the measure gets a majority vote in November, the BTA has a retroactive “tax obligation date” of January 1, 2026, just a few short months after it was proposed. That means any billionaire who was a California resident on that date is subject to the tax (if it passes). But a much larger number of Silicon Valley founders and key employees find themselves in the same boat for different reasons under California’s general residency rules: the prospect of large income tax savings by changing residency at the last minute before an impending acquisition or IPO is finalized. The BTA may only affect a few individuals, but it represents a major issue of residency tax planning writ large: how do you change residency with an imminent taxable event about to touch down. It isn’t easy, though it can be done, with proper planning and the understanding of the details for changing residency by a specific date.
But first some background on how we got here.
Background
Like the redistricting proposition passed by California in 2025, the BTA was set in motion by policy disagreements between the major political parties in Washington DC. In the case of the BTA, it was the result of the 2025 federal tax bill that substantially cut funding for Medicaid as well as programs for education and food support. For California, a state with 15 million people depending on Medi-Cal and other programs facing reduced federal funding, the federal tax changes raised the specter of a $30 billion budget deficit in the coming years. Even for a state whose annual budget exceeds $300 billion (which is larger than that of most countries), this potential shortfall was daunting. Some analysts conclude that the deficit may be structural, but there is no doubt the recent knives-out policy changes in Washington are the primary cause for the Act appearing at this particular moment.
In addition, the sheer magnitude of the BTA distinguishes it from most tax increases. While only applicable to a handful of taxpayers, by imposing a 5% tax on the net worth of billionaires, the Act is projected to raise $100 billion in revenue over 5 years, with much of that revenue derived from a single sector, the tech industry (about half of California’s billionaires are associated with Silicon Valley). If the projections are accurate, that would be about $20 billion a year, or about 7 percent of California’s annual budget, not taking into consideration the cost of the program. While proposed taxes on the assets of high net worth taxpayers have been kicking around the California legislature for several years, they never got traction until the deep federal cuts of 2025.
But even then, it was clear that a wealth tax wouldn’t make it through California’s often byzantine legislative process, which requires a two-thirds majority to enact tax increases. Governor Newsom has staunchly opposed wealth taxes in the past and publicly opposes the BTA. Democrats have a supermajority in the state legislature and can pass any tax legislation they want, but all the state senate districts in Silicon Valley are held by Democrats who either oppose the Act or have remained silent on the issue. As a result, the BTA came into being as a state-wide ballot measure sponsored by a major healthcare union, rather than going through the more predictable and visible legislative process. Almost without warning, it seems well on its way to obtaining the sufficient number of signatures to qualify for the ballot in 2026 (the deadline is in June 2026). If it does get on the ballot, as a citizen’s initiative, it only needs a simple majority to become law.
This sudden appearance on the tax radar scope has implication for the residency issues raised by the Act, in particular its retroactive application. And that is the real focus of this article, since the same fundamental rules affect anyone planning to change residency from California, even if the BTA itself only touches the thin upper stratosphere of taxpayers.
Where Things Stand
The BTA is expected to appear on California’s general election ballot in November 2026. That is, the midterms. This is significant since a midterm election will likely result in higher voter turnout than an off-year, primary, or special election. Presumably, it will raise the chances of the Act passing. It should be noted, however, that California voters have a long history of using the initiative process to actually reduce taxes, rather than raise them, the most famous example being Proposition 13. It isn’t a foregone conclusion that the BTA will be approved. It isn’t a foregone conclusion that it will even qualify for the ballot. On the other hand, initial polling data shows overwhelming support.
California and national media have been quick to report that a number of prominent figures in the tech and financial industries (the two are intimately related in California) have indicated that they are considering moving from California and re-domesticating their companies in lower income tax states. The prospect of an exodus of capital from Silicon Valley, affecting the entire tech ecosystem, has become inevitably linked to discussions of the BTA.
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The retroactivity provision was included for obvious reasons: if the Act didn’t affect taxpayers until it passed in November 2026, the incentive for billionaires to leave the state would have been overwhelming
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This may or may not happen in the long run. However, our contacts with officials at the Franchise Tax Board, California’s tax enforcement agency with respect to residency audits, indicate they aren’t worried in the short run, as applied to the BTA. The reasons involve the timing for changing residency and the difficulty of doing so on short notice. The caveat to this relates to the possible invalidity of the BTA’s retroactive provisions, discuss later in this article.
It’s on this issue that the BTA and the ordinary rules of residency planning converge.
Retroactivity And The Timing Of A Residency Change
If it does pass, the Act contains retroactive language purporting to impose a one-time tax on any “applicable individual” who is a resident of California as of January 1, 2026, even though the initiative can’t go into effect until the election at the end of the year. (As a reminder, the only applicable individuals must have assets with a fair market value of a billion dollars, minus debt and other exclusions, as of the valuation date provided in the Act, which by the way is also partially determined retroactively and proactively, involving a look-back for transferred assets and a present valuation of future interests). The retroactivity provision was included for obvious reasons: if the Act didn’t affect taxpayers until it passed in November 2026, the incentive for billionaires to leave the state would have been overwhelming, and they would have had plenty of time to do so. In fact, the original language of the Act had a retroactive effect date of January 2025, but that was abandoned as an overreach. It’s one thing for a state to impose a tax retroactively from the beginning of the tax year. It’s quite another to apply it to a prior tax year.
“Applicable individual” means, for the 2026 tax year, any individual who is a resident of California “within the meaning of Sections Rev. & Tax Code sec. 17014 and 17015.5.” These sections (along with their regulations) broadly define who is a resident for tax purposes and who is not. To determine whether a taxpayer is a resident or not under the code, California uses the “closest connection test.” The test deploys a body of rules, some intuitive, many not, involving comparing all the contacts taxpayers have with California vs. their home state, and weighing them, in totality. The contacts are often called the Bragg factors, after the leading case in his area, Appeal of Bragg (2003-SBE-002). They involve physical presence, living accommodations, official and non-official representations of residency, social and family contacts, location of professionals, assets, work. A discussion of the test is here.
But applying the Bragg factors by rote won’t insure a taxpayer is a nonresident. In fact, it can likely lead to the opposite result, particularly if a change of residency is at issue (as opposed to a nonresident who is establishing contacts with California, such as a second home or business interests). That’s because not all contacts weigh the same for residency purposes. The weightiest contacts in general, the ones that determine the vast majority of residency adjudication are (a) physical presence (time spent in California vs. the home state during the tax year), and (b) living accommodations (homes in California vs. a primary residence claimed in the taxpayer’s home state). But that too can be a trap for the unwary. The other categories involving what most people might consider trivial details can have a disproportionate impact on showing intent to change residency, which is always the starting point of residency planning involving a move from California.
To successfully claim nonresident status, a California resident has to first change residency, and that involves an entire body of secondary rules. Some overlap with the closest connection test. Some don’t. And the change of residency has to be completed before the taxable event.
For founders of startups and other taxpayers moving from California in anticipation of exiting their companies or otherwise recognizing gains from a liquidity event, that date is the date of the receipt of income. If the taxpayer takes all the actions necessary to change residency before the income receipt (which is usually the closing of escrow on a merger and acquisition or IPO), California can’t impose an income tax on it, unless it is California-source income (but that’s a different subject). The BTA isn’t an income tax; it’s a net worth tax. The timing doesn’t involve receipts of income. Under its retroactivity provisions, if the applicable individual was a resident on January 1, 2026, the tax is imposed, regardless of the timing of any receipts of taxable income. A subsequent change of residency won’t circumvent the tax (though as discussed later, it might do so if the retroactivity language is deemed invalid and it also might affect allocation of the tax among the states).
Changing Residency From California
California taxpayers (and their attorneys) who only focus on the closest connection text and the associated Bragg factors often overlook the first step in exiting California: demonstrating intent to change residency. This almost always requires occupying an abode in the taxpayer’s new home state with the intent to live in that state permanently or indefinitely. In a residency audit, the FTB doesn’t ask taxpayers what they intended (they would all say they intended to change residency). Rather it derives intent from conduct, applying an array of mostly nonintuitive rules that have arisen over decades as the result of regulations, case law, Chief Counsel rulings, and audit practices. Nobody was at the wheel in making these rules. To put this another way, residency status isn’t a subjective matter; it isn’t what taxpayers believe about where they reside, even if those beliefs are well founded. Rather, it is the result of a mechanical application of rules, which more often than not are nonintuitive, if not obscure.
More to the point, complying with those rules is often difficult to accomplish in a short period of time, particularly for taxpayers with long-standing and complex contacts with California. The FTB knows this and has an incentive to audit taxpayers who move shortly before a taxable event. Under the BTA, that date was January 1, 2026, assuming the retroactive provisions withstand judicial scrutiny. Thus, on its face, the ship has sailed for changing residency with respect to the Act, unless the change was made prior to the beginning of the year. But again, a possible escape hatch exists, discussed later.
Occupying, Not Just Buying or Renting
The first element of changing residency is rather obvious, but a surprising number of taxpayers don’t take it to heart. It’s not enough to own or lease an abode in the new jurisdiction. It has to be occupied. A taxpayer can buy the Palace at Versailles, but unless he goes there physically, turns the poignée de porte, and enters the premises with the intent to live in that jurisdiction going forward, he hasn’t moved there and his California residency status remains intact.
Moreover, the new dwelling has to be the sort of abode you can actually move into. Generally, a hotel or Airbnb won’t suffice since they are by definition temporary or transitory, and don’t lend themselves to moving the personal items that constitute the center of a taxpayer’s life, which goes to intent (our next topic).
A leased or rented apartment or home will do as a stopgap measure before buying or building a new home in the jurisdiction, but this raises the “interim home” problem, discussed here. If significant furniture and furnishing can’t be moved into the rental (because its already furnished or simply lacks the space to accommodate a move-in of items important for showing intent to live in the new jurisdiction permanently), then the FTB may dismiss the move-in as mere pretext. A subsequent move into a newly purchased or built home may suffice, but if timing is an issue, it may be too late.
Moreover, even if the rented property is amenable to a move-in of personal effects, it raises other problems. A rented property never compares favorably to property owned in California for personal use. To bring up Versailles again, a taxpayer who rented the palace and transported his belongings there, but still owns even an ordinary home in California as his former residence, he would likely lose in the living accommodations category. Owning residential real property has indicia of intent to live permanently in a jurisdiction that usually outweighs rentals of any magnitude.
Finally, a short-term lease is suspicious. It may defeat the claim of a move-in because it lacks the indications of permanency or indefiniteness, even if the taxpayer ultimately moves into a home they purchase. That, at least, is what the FTB usually argues in an audit involving a move-in date dispute.
All these problems are exacerbated when the move involves short notice to meet a deadline. Which again, for the BTA was the beginning of this year.
Center of Life and Intent to Change Residency
Occupying a home in the new jurisdiction is necessary, but not sufficient. In addition to physical presence, a taxpayer changing residency has to move his “center of life” to the new jurisdiction. Here it gets complicated or at least unclear. “Center of life” is a term of art in residency law. It isn’t clearly delineated in judicial opinions. However, what case law we have identifies items of sentimental value, such as family heirlooms, family photo albums, gifts, as indicative of moving the center of a taxpayer’s life. In addition, auditors usually focus on tangible personal property of monetary value, like jewelry and expensive artwork, as well as personal items such as electronic equipment, important papers, musical instruments, sports gear, a taxpayer’s best clothing, favorite lounge chair, best china, and so forth.
In short, these are the kinds of items people keep in their primary residence, not in a second home. They aren’t systematically listed anywhere in the law per se. The only way to get a full sense of what the FTB expects to see moved to the new abode is by having worked on numerous residency audits where the timing of the move is an issue. And giving the FTB what they expect in a residency audit is the best way to prevail in one.
What taxpayers absolutely must avoid is keeping these center of life items in their former California primary home (assuming they retain one, which for our clientele is usually the plan). In that case, the FTB auditor might conclude that the taxpayer’s new out-of-state home is just a vacation home, not a primary residence, at least until those items are in fact moved there. This is a common mistake of taxpayers (and their attorneys) attempting to change residency on short notice.
Note that center of life items don’t coincide directly with the Bragg factors. Most Bragg factors are “lagging indicators.” They need to get done as soon as possible as part of a change of residency, but most can’t be carried out by the move date itself. For instance, obtaining a driver’s license in the target state is a typical Bragg factor necessary to change residency. It’s in the official representations category. But taxpayers generally can’t obtain a new driver’s license without first moving into a permanent residence in the state. Every jurisdiction requires an application for the license to include a declaration providing a local street address identified as the taxpayer’s primary residence. But that means that the driver’s license won’t be issued until weeks after the move date (during the COVID pandemic it was often months). Bragg factors usually demonstrate intent to move, but only after the fact.
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More than a few residency audits involving millions of dollars in taxes, interest, and penalties run aground because taxpayers (and their attorneys) fail to retain a “residency file” documenting the change of residency and subsequent compliance with the rules
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Note further that details, often ones that seem trivial, matter in changing residency. For example, keeping a safe deposit box in a California bank after a move can undermine a claimed move date. Why? Because almost by definition safe deposit boxes store items that are valuable, either monetarily or for sentimental reasons, and those are exactly the sort of center of life items that need to be moved to the new home state in a residency change. Keeping personal property in storage in California after the move date can have a similar unfavorable effect.
Cost and Inconvenience
One of the fundamental principles of changing residency is that it almost always requires cost and inconvenience. The above examples demonstrate that.
For example, a taxpayer moving on short notice may have to enter a long-term lease if an interim home is part of the plan, even if the larger plan involves moving into a permanent home shortly after the move. It always requires moving center of life items to the new abode, even if there is no real practical purpose to that for taxpayers who can sustain two or more homes filled with expensive furniture and furnishings (which is exactly the type of taxpayer affected by the Act). It’s just a rule that has to be followed, even if it doesn’t make sense. And usually, the most onerous requirement is the limitation of time a former resident can spend in California. If a taxpayer moves to another state, and immediately returns to California, spending equivalent time or more time there than in their new home state for the balance of the year, it is almost foreordained that a residency audit will have an unfavorable outcome.
The Burden of Proof Problem
Even assuming a taxpayer does everything correctly in changing residency on a specific date before a taxable event, even assuming they endure the inevitable cost and inconvenience, it doesn’t help if the taxpayer can’t prove it. A residency adjudication is not like a criminal trial, where the prosecution has to prove its case, and the defendant can take the Fifth. Virtually every residency case opinion begins its analysis section with the words: “FTB’s determinations of residency are presumptively correct, and the taxpayer bears the burden of showing error in those determinations.” That means that the burden of proof is almost always on the taxpayer in a California audit to prove change of residency and when that took place.
In particular, taxpayers not only have to identify and transport the items that are central to their life, and account for their whereabouts, but they have to document the move. It’s important to inventory the items and memorialize for their transport to the new home state. This can take various forms: taking photographs, using a moving company, keeping invoices, retaining insurance policies for valuable items. And they have to keep track of their days in California and their home state (the comparison is between those two jurisdictions – time elsewhere doesn’t help taxpayers establish nonresidency). The statute of limitation on a residency audit is four years from the date of the filing of a California tax return. Usually, the pertinent return is a 540NR part-year return for the year in which a change of residency occurs, which is filed in the next tax year. The FTB rarely audits a former resident upon the filing of the 540NR part-year return. It usually waits at least another year to see what pattern is forming. And it can wait up to four years. The point is, years may pass before the taxpayer is audited. Without written documentation, a taxpayer is likely to forget many of the details of their move by then, as well as where they spent their time.
More than a few residency audits involving millions of dollars in taxes, interest, and penalties run aground because taxpayers (and their attorneys) fail to retain a “residency file” documenting the change of residency and subsequent compliance with the rules. There’s nothing the FTB auditors look forward to more than a disorganized taxpayer who can’t provide detailed documentation to support their claim of nonresidency because they didn’t keep supporting evidence.
The FTB Holding the Cards
Circling back, all this helps explain why the FTB doesn’t seem concerned about a pre-2026 exodus of billionaires. Assuming the retroactivity provisions are deemed valid, the window of opportunity for the individuals affected by the law was so narrow, and general knowledge of how to change residency (even among tax lawyers) so limited, that the FTB expects to taxpayers who opted to change residency to have made the common mistake of focusing on the Bragg factors, and not the intent factors. Where that happened, the result would likely be an unfavorable outcome for the taxpayer, which is commonplace in the more prevalent situation of founders and key employees exiting under an imminent deadline involving a liquidity event. Different circumstances, same problem. FTB auditors have seen this all before.
Of course, for the billionaires who did plan properly, if any, the FTB will face a difficult challenge. An auditor can’t prevail in a residency audit if center of life items were identified, transported, and memorialized in a context demonstrating intent to change residency on a date before January 1, 2026, and the lagging Bragg factors all support that conclusion.
Severability
Finally, there is an additional possible escape hatch for those who didn’t move before the January date, or tried to but failed to meet the intent requirement.
The BTA has a severability clause. It states that if any provision of the Act is deemed invalid by a court, the other provisions remain in effect. In particular, the Act requires that if a court finds the retroactive provisions unconstitutional, then the court must “preserve the imposition of the tax authorized, including by reforming dates or period specified, using the most limited adjustments possible to cure any constitutional or other legal defect.”
The purpose here is clear. The drafters of the Act knew that using a retroactive date would raise constitutional challenges. If those challenges are successful, the default date under the severability clause would likely be the date of the Act’s passage. Applicable individuals who are still residents on that date will owe the tax.
But note that this gives the taxpayers who didn’t move by the beginning of the year a second, if contingent, bite of the apple. Assuming those taxpayers move after January 1, but before the Act’s ratification in November, and assuming challenges to the retroactive application of the Act prevail, then a well-executed change of residency plan during the interim time period could survive a residency audit. And this time, it doesn’t involve moving on short notice, but doing so with many months to accomplish the move before the date the tax is imposed. It also provides a possible grace period for those who did attempt to move before the deadline, but didn’t get it right, for the reasons discussed in this article.
That’s exactly the scenario the FTB does not want to face.
Of course, there’s a risk. If the Act’s retroactive date of application does survive judicial scrutiny, the change of residency, which is no simple matter as discussed above, would be for nothing, at least with respect to the 5% tax imposed on net worth. It would, however, protect non-California-source income received by the nonresident after the move date going forward.
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Manes Law is the premier law firm focusing exclusively on comprehensive, start-to-finish California residency tax planning. With over 25 years of experience, we assist a clientele of successful innovators and investors, including founders exiting startups through IPOs or M&As, professional athletes and actors, businesses moving out of state, crypto-asset traders and investors, and taxpayers who are able to live, work, or retire wherever they want. Learn more about our services at our website: www.calresidencytaxattorney.com.
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