California and part-year return (TurboTax)

[statsman]

As posted previously, we moved from California to Texas in October 2018. The actual day of the move is debatable. We arrived in Texas on 10/21, the day our house lease started in Texas, but we didn't physically move in until 10/27 when the furniture arrived. The sale of our house in California closed escrow on 10/23. All addresses for financial, pension and SS accounts were updated to the Texas address on 10/29-10/30.

For the sake of filing, I decided all income and interest earned through 10/31 would be taxable in California. The primary issue was the money market interest paid on 10/31. I could have (according to TurboTax) pro-rated the yearly interest earned on the date of the move (pick one! LOL!), but that actually works out worse than just leaving all interest earned through 10/31 for California.

The biggest issue right now is the sale of our house. It had a large capital gains well beyond the $500K exemption. In addition, we had a carryover capital loss from 2017. Since we had lived our entire lives in California prior to last October 2018, I would have figured the entire carryover capital loss from 2017 would be applicable to our part-year California return, especially since the entire capital gains of the house sale would also be applied to California.

The problem is TurboTax is pro-rating the carryover capital loss for California based on our move date. For now, I've entered 10/23 as the move date as that was the day our house sale closed in escrow in California. By that time, we had been in Texas for two days.

Am I misunderstanding how we apply the carryover capital loss for California in a part-year return? Is it possible I have answered the questions wrong in TurboTax (been through them 10+ times), causing it to apply the pro-rating? Or is it possible TurboTax has an error?

 

[cathy63]

Turbotax is correct on this. The carryover loss from prior years is prorated while the entire cap gain occurred on the date of the sale. Since you can't use the loss at all in TX, then depending on your income for the final 2 months of the year it might actually be better to claim CA as your residence for the entire year. CA is not going to come find you and argue that you left earlier, especially since you have lifelong ties here. Figure the tax both ways and pick the one that works out best.

See page 18 of FTB pub 1100 for instructions on apportioning the loss: https://www.ftb.ca.gov/forms/misc/1100.pdf

 

[statsman]

Turbotax is correct on this. The carryover loss from prior years is prorated while the entire cap gain occurred on the date of the sale. Since you can't use the loss at all in TX, then depending on your income for the final 2 months of the year it might actually be better to claim CA as your residence for the entire year. CA is not going to come find you and argue that you left earlier, especially since you have lifelong ties here. Figure the tax both ways and pick the one that works out best.

See page 18 of FTB pub 1100 for instructions on apportioning the loss: https://www.ftb.ca.gov/forms/misc/1100.pdf

It would be worse to include the pension income, interest, and inherited IRA RMD earned in November and December while in TX back to California just to get back the full carryover loss.

Ugh. We're talking about a reduction of about $11K in our carryover loss for California, and because of the large capital gains on the house sale in excess of the $500K exemption, a fair amount of additional California taxes. As if our final tax bill for California wasn't bad enough.

I will also assume that although the sale of the CA house closed in escrow on 10/23 and we were in TX on 10/21 (also when our lease there started), there isn't a reduction of the federal capital gains on the house sale for CA.

 

[statsman]

Upon some additional research, I have further information into our situation. When filling out TurboTax for a California part-year return, we are presented with the following entries:

(1) Prior Year Carryover Loss as if CA Resident for All Prior Years, (2) Prior Year Carryover Loss as if CA Nonresident for All Prior Years.

TurboTax entered the full carryover amount for entry #1, but for entry #2, it is '0'. According to what I've read, this is correct if all of the carryover losses came from sources other than CA property (stocks, etc.). Our entire carryover loss from 2017 (and before) came from a house my wife and her siblings inherited that was sold for a loss.

When I entered the full carryover capital loss for entry #2, the CA part-year worksheet ended up applying the entire carryover capital loss against the gain of our house sale. The resulting CA tax bill is what I would have expected, but now I need to confirm what is being described above is correct.

 

[CaliKid]

Sounds like it's time to hire an experienced CPA or tax lawyer.

 

[Bir48die]

+1

So as I see it you will have basically a ten month partial return for California. Texas does not have the 13.3% CG rate that Cali has so state wise no effect with them. Carry Forward for Feds is already rolled up so whatever portion you've got for for Cali would basically be 5/6th to claim against the same with CG. You have enough moving pieces that I would seek some help. Not sure how May CG entries you have but those can be imported to save time and money.