Leaving California? The Taxes That Still Follow Your Newport Beach Home Sale

by Dar Mardan

The front entrance of a Newport Beach home whose owners are downsizing and moving out of California

If you move out of California, do you still owe California tax when you sell your Newport Beach home?

Yes. California taxes the gain on California real estate no matter where you live when you sell. Moving to Nevada, Arizona, Texas, or Idaho before the sale does not take the gain out of California's reach, and neither does spreading the payments over several years. What moving out can change is how your other income is taxed and whether you keep the federal home-sale exclusion, which depends on how long you've been gone when the house closes.

We hear the plan often: "We'll move to Henderson first, then sell the Newport house, so we won't owe California." As a CPA, I have to tell clients it doesn't work that way for the house. This post explains what does and doesn't follow you across the state line.

Key takeaways

California taxes nonresidents on gains from California real property, according to the Franchise Tax Board.
An installment sale doesn't avoid it. California taxes installment payments a nonresident receives from selling California real estate.
The federal exclusion of up to $250,000, or $500,000 for most married couples, still applies if you owned and lived in the home for 2 of the 5 years before the sale. Wait too long after moving and you can lose it.
California taxes capital gains at ordinary income rates, so a large gain on a long-held home can reach the state's top bracket.
Prop 19 stops at the state line. Your low property tax base can't follow you to another state.

Why does California still tax the sale after you move?

States tax real estate gains based on where the property is located. The Franchise Tax Board's Publication 1100, which covers nonresidents and people who move out, says California taxes real property based on where the property is located, and it taxes the installment proceeds a nonresident receives to the extent the income came from a California source. A house in Newport Beach is California-source income whether you sell it the week before you move or 2 years after.

California treats capital gains as ordinary income, with no lower rate for long-term gains. For a longtime owner with a large gain, that can mean the top state rates apply to part of the sale. Our post on how much capital gains tax you'll pay when you sell in California walks through the calculation.

What about an installment sale?

Some sellers try carrying a note for the buyer so payments arrive after they've moved. California closed that door years ago. The FTB's installment sale instructions state that since January 1, 2002, California has taxed installment gains a nonresident receives based on where the property is located. An installment sale can still spread the income across years, which may lower the rate, but it doesn't change which state taxes it.

Do you keep the federal home-sale exclusion if you move first?

Usually, if you don't wait too long. The federal exclusion lets you exclude up to $250,000 of gain, or up to $500,000 for most married couples filing jointly, if you owned the home and used it as your principal residence for at least 2 of the 5 years before the sale. IRS Publication 523 explains the test. California follows the same rule.

That 5-year lookback is what matters when you move first. If you lived in the home until you left, you have about 3 years after moving out to sell and still pass the 2-out-of-5 test. Rent the house out in the meantime and you may also owe tax on depreciation taken during the rental period. Our post on selling a home after renting it out explains how that works.

When you sell	Federal exclusion	California tax on the gain
Before you move	Available if you meet the 2-of-5-year test	Yes, on gain above the exclusion
Within about 3 years after you move	Usually still available	Yes, as California-source income
More than about 3 years after you move	Usually lost or reduced	Yes, as California-source income
On installments after you move	Depends on the 2-of-5-year test at the sale date	Yes, as each payment is received

Will California withhold tax at closing?

California requires escrow to review real estate sales for withholding on Form 593. If the property was your principal residence under the federal rules, or if you last used it as your principal residence, you can generally certify an exemption, even after moving. If no exemption applies, the default withholding is 3 1/3% of the sales price, or an alternative amount based on your estimated gain. The FTB's Form 593 instructions list the exemptions. Withholding is a prepayment credited on your California return, not an extra tax.

What does moving out change?

Moving out of California doesn't help with the house, but it can matter a great deal for the rest of your income. Once you're a nonresident, California generally taxes only your California-source income. Federal law also generally prevents states from taxing most retirement income, such as pensions and IRA distributions, of people who no longer live there.

California looks at the whole picture when deciding whether you've really left. The FTB's Publication 1031 lists the factors it weighs, such as where your spouse and family live, where you're registered to vote, where your driver's license is from, and how much time you spend in each state. Talk to your CPA about the year you move, because you'll likely file as a part-year resident.

What about property tax in your new state?

Prop 19 lets eligible homeowners carry their low property tax value to a replacement home anywhere in California, but not outside it. Once you buy in another state, you start fresh under that state's rules. Some states tax homes at a lower effective rate than California, and some at a higher one. Before you choose a destination, compare the full yearly cost of the new home with what you pay now under Prop 13. If you might stay in California after all, see who qualifies for Prop 19.

How should you plan the sale if you're leaving California?

Calculate your gain before you move. Gather your purchase records and improvement receipts. Our post on the cost basis problem behind a long-held home explains which receipts count.
Decide whether to sell before or after the move. California taxes the house either way, so let the other factors decide: where you'll live in between, whether you want to move once, and how the year you move affects the rest of your income.
Don't let the 3-year window slip. If you move first, put the sale on the calendar so the federal exclusion doesn't expire.
Look at the rest of your tax picture. A large gain can raise your Medicare premiums and the tax on your Social Security. Our post on how a home sale affects Medicare premiums covers it.
Plan the empty house. If you move first, the home will sit empty. Tell your insurer, keep the utilities on, and have someone check on it every week.

For the bigger decision about leaving a longtime home, our guide to selling your longtime home in Newport Beach covers the practical side.

Frequently asked questions

If I move to Nevada before I sell, do I avoid California tax on my house?

No. California taxes gains on California real estate no matter where the seller lives. Moving first doesn't change that.

Can I avoid California tax with an installment sale after I move?

No. Since 2002, California has taxed installment payments a nonresident receives from selling California property. An installment sale can spread the income over several years, but California still taxes it.

How long can I wait after moving to sell and still use the $250,000 or $500,000 exclusion?

You need to have owned and lived in the home for 2 of the 5 years before the sale. If you lived there right up until the move, that generally gives you about 3 years after moving out.

Will escrow withhold California tax because I'm a nonresident?

Not if you qualify for an exemption, such as the home being, or last being, your principal residence. Otherwise, escrow withholds 3 1/3% of the sales price or an alternative amount based on your gain, which is credited on your California return.

Can I use Prop 19 to move my property tax base to another state?

No. Prop 19 transfers only work for replacement homes in California.

Does California tax my pension after I move away?

Federal law generally prevents states from taxing most retirement income of nonresidents. Confirm how it applies to your accounts with your CPA.

References

Leaving California? Let's plan the sale first

We'll estimate your gain, map the timing around your move, and coordinate the sale whether you're still here or already settled in your new state. Book a complimentary consultation or call Dar at 714-612-3870.

Dar Mardan, CPA, MBA | Vidar Group Real Estate – REAL Broker | DRE #02121982

This article is general information, not tax or legal advice. Confirm your situation with your CPA before you move or sell.