Tax rate for ex-Californians

[catotx]

I bet there must be more than a handful of ex-Californians here.

I am a California resident now but plan to move out of state when I ER next year.

My question is this: suppose after I ER, I keep a rental property in CA and collect a yearly rent of $30k. What is the CA tax rate on this rent?

This $30k will be the only income that is sourced in CA. Do I pay tax based only on this $30k on the CA tax return?

I think CA is known for its aggressive stance against ex-residents that I think it must be something more. Could the return be somehow also based on other factors in my federal return?

Thanks.

 

[Souschef]

CA Rental

Based on my experience renting out my condo, you will not be taxed on the 30 K. You can deduct mortgage interest, property taxes, insurance, maintenance and depreciation, same as on the Federal return.

 

[MasterBlaster]

California taxes your California income as a percent of your total income. So for example, if all your labor and investments bring in $100k a year and $30k of that was from California, then you'll pay 30% of the income taxes for someone in California with a $100k income. If someone in California with a $100k income owes $6k, then you would owe 30% of that or ($1800) to California.

You'll need to file California form 540NR each year to California.

 

[catotx]

California taxes your California income as a percent of your total income. So for example, if all your labor and investments bring in $100k a year and $30k of that was from California, then you'll pay 30% of the income taxes for someone in California with a $100k income. If someone in California with a $100k income owes $6k, then you would owe 30% of that or ($1800) to California.

You'll need to file California form 540NR each year to California.

Thank you! Your explanation is very clear.

By using this method, it looks like the CA FTB is able to apply the higher CA tax brackets to non-residents compared to just using CA-source income. Is CA the only state to apply this formula or is this common among the states?

 

[lemming]

whoa. I think they count all your income to get your tax rate then apply that rate to CA income.
Shamelessly pulled from Turbotax answer forum https://ttlc.intuit.com/questions/1...t-when-clearly-non-california-income-is-added
So you do report everything but towards the end of the interview (Adjustments to Income / Income and Expense Adjustments / Nonresident Adjustments) is where you allocate the California-source income which is multiplied by the net tax rate. See Form 540NR, lines 31 - 42 and Schedule CA(540NR).

 

[MasterBlaster]

By using this method, it looks like the CA FTB is able to apply the higher CA tax brackets to non-residents compared to just using CA-source income. Is CA the only state to apply this formula or is this common among the states?

I can't speak for other states, but I suspect that they do something similar.

From your last post, it seems you believe that you are paying California's top tax rate only. The reality is that you are paying the California average tax rate for someone of your income.

So again, figure your total tax on all your income and pay a percentage-wise on that of what's earned in California. That's the only fair way to do it.

California does have higher income taxes than many other states. However many other states have really high property taxes. So one way or the other you pay. The mix changes but the pain is nearly the same.

- Death and Taxes !

 

[catotx]

I can't speak for other states, but I suspect that they do something similar.

From your last post, it seems you believe that you are paying California's top tax rate only. The reality is that you are paying the California average tax rate for someone of your income.

So again, figure your total tax on all your income and pay a percentage-wise on that of what's earned in California. That's the only fair way to do it.

California does have higher income taxes than many other states. However many other states have really high property taxes. So one way or the other you pay. The mix changes but the pain is nearly the same.

- Death and Taxes !

Yes, I understand the part of the average tax, just like I could be in the 28% federal bracket but the average rate I pay is lower.

 

[catotx]

On a related note, I have been evaluating the options of what to do with the rental property in CA when I move out.

Another option is to sell it and pay tax on about $250k of capital gains.

Or I could do a 1031 exchange to rental properties in my new state to defer the tax. That is when I encounter the FTB 3840 annual filing requirement. You are required to report the status of the exchange to CA, every year, until the property is sold.

 

[Senator]

I have rentals in MN, and I asked my tax accountant about it. Any income earned in the state, is taxed in the state.

So, your $10K net will be likely be taxed in CA.

 

[pb4uski]

California taxes your California income as a percent of your total income. So for example, if all your labor and investments bring in $100k a year and $30k of that was from California, then you'll pay 30% of the income taxes for someone in California with a $100k income. If someone in California with a $100k income owes $6k, then you would owe 30% of that or ($1800) to California.

You'll need to file California form 540NR each year to California.

That is exactly the way my Mom's rental in Vermont works. She lives in Florida (no tax just like Texas) but essentially does a return as if she were a Vermont resident that includes all her income ($100k in the example) and then the resulting tax ($6k in the example) is multiplied by a ratio of her Vermont income divided by her total income (30% in the example). I think this approach is pretty common for non-residents.

 

[scrinch]

Ex-Californian here with a rental house, owned outright, earning right around $30k/yr. Just got my tax return back from the tax accountant this morning. I owed $1042 in income tax to CA after all expense deductions, depreciation, exemptions, etc.

I'll be moving back to California and into the house when I RE in a few months.

 

[Another Reader]

As a California resident, if I leveraged up my California rental to the point it is not producing any net income after interest, depreciation, and operating expenses, I would not pay tax on the rental income. Are you saying even if the net income produced by the property is zero, I am going to have to pay income tax to California if I move to a low or no income tax state? I was at one point considering moving all the leverage on the rentals to the California properties and then moving out of state, with the idea that I would not have to pay taxes on the two rentals I would then have in California.

 

[MasterBlaster]

As a California resident, if I leveraged up my California rental to the point it is not producing any net income after interest, depreciation, and operating expenses, I would not pay tax on the rental income. Are you saying even if the net income produced by the property is zero, I am going to have to pay income tax to California if I move to a low or no income tax state? I was at one point considering moving all the leverage on the rentals to the California properties and then moving out of state, with the idea that I would not have to pay taxes on the two rentals I would then have in California.

No taxes are due for an unprofitable rental house. This is true if you live in state or out of state.

If when you sell the rental house there is a net sales profit, then you will pay taxes on that. California taxes capital gains the same as income.

 

[Another Reader]

That's why you borrow the equity out at low rates and allow the heirs to enjoy a stepped up basis.

 

[scrinch]

Do you have to pay taxes on earnings from the money you borrowed using the property as collateral?

Sent from my XT1254 using Tapatalk

 

[Another Reader]

You would pay income tax on the net income of the unleveraged properties at the rate of the state where they are located. Since that state tax rate in my case maxes out at less than half the California rate, the savings are not insignificant.

 

[MasterBlaster]

Do you have to pay taxes on earnings from the money you borrowed using the property as collateral?

Yes you pay taxes on any earnings.

But you pay them to the state you reside in. In the OP's case California should not get anything on the earnings from money you borrowed using the property as collateral.

So for example, if you take our a loan from the California property of $100k and invest that in a stock mutual fund, then dividends and capital gains from the mutual fund are taxable only in your home state. However loan interest (and any other expenses) on the California secured property is deductible against California income.

 

[catotx]

Does anyone have any experience with 1031 exchanges? I am thinking about this scenario.

I am going to ER in GA. Suppose I exchange a rental property from CA to GA to defer the capital gains, say worth about $100k. For several years, I rent out the property in GA, filing the FTB 3840 to CA in the meantime every year. I pay federal and GA taxes on the rental income earned but no tax is due to CA.

In year 10, the stock market crashed and I harvested a huge amount of losses, e.g. $150k. The property market remains robust though and I decide to sell the rental property in GA. The sale of the rental property will net a capital gain of $150k (including recaptured depreciation).

My question: will the $150k in realized stock market losses offset against the $150k capital gains in the rental property sale such that there is no federal, CA and GA taxes due?

 

[Another Reader]

Sorry, I should have stated that I would live in the state where they are located or in Nevada, which has no income tax. Tax would be due on the net income after all expenses in the state where they are located in either of these scenarios.

 

[MasterBlaster]

My question: will the $150k in realized stock market losses offset against the $150k capital gains in the rental property sale such that there is no federal, CA and GA taxes due?

That's a good question of which (believe it or not) I don't know the answer.

More broadly, How are interstate 1031 exchanges handled against California and Georgia taxes ? And can investment losses in one state be used against gains in another or are they totally independent ?

Please enlighten us !

 

[MasterBlaster]

More broadly, How are interstate 1031 exchanges handled against California and Georgia taxes ?

I researched this out of curiosity. Watch out this is a tax nightmare, California will get it's proportional share and the home state may get a full share increasing the total tax load. Can you say "Double taxation" . In addition California demands yearly reporting of the exchanged property's status.

State of California Claw-Back Provision

The State of California's position has been that any capital gains accrued on California real estate will be subject to California tax upon the ultimate sale of the real property even if the investor had sold his or her California real estate and subsequently 1031 Exchanged into investment property located outside of California. This has become known as the California Claw-Back Provision.

For example:
Say Mr. Newcombe bought a property in CA for $100. After appreciating to $200, he exchanges it for one in ID. While in ID the property further appreciates to $400. Feeling he has had enough of owning property, he sells it for $400, showing a total capital gain of $300. Mr. Newcombe would not only be liable for $300 of capital gains taxes in ID, but $100 of capital gains taxes in CA as well.

Note: The reciprocal of this situation does not come into effect. If Mr. Newcombe owned property in ID and exchanged for property in CA, he would only be subject to CA state taxes, not those of ID.
From the above example it is clear that owning property in California and exchanging it for property in another state leaves one open to double taxation. There is no way to avoid this situation unless one stays out of CA entirely or performs the final sale there. Being taxed in CA would of course be undesirable because it has some of the highest income tax rates, 9.55% and 10.55% for earnings over $47,055 and $1,000,000 respectively.

The California Claw-Back Provision really hurts people when they try to exchange out of California's stringent tax system into a friendlier state tax system such as Nevada, Texas or Florida, which has no state income tax.

read more here:


http://www.exeter1031.com/article_california_claw_back_provision.aspx

 

[catotx]

Yes, the annual filing requirement is the FTB 3840 that I was talking about. But it is just one form, not a full CA tax return.

However suppose in the year of sale, there are losses to offset. I presume in that year, I would have to file a full CA return, showing that the Schedule D from my federal returns has zero capital gains. I think this number will be transferred to the CA return.

 

[MasterBlaster]

However suppose in the year of sale, there are losses to offset. I presume in that year, I would have to file a full CA return, showing that the Schedule D from my federal returns has zero capital gains. I think this number will be transferred to the CA return.

Are the off-setting losses from California income or from your home states income ? If they are not from California then I suspect they wouldn't be allowed.

 

[catotx]

Are the off-setting losses from California income or from your home states income ? If they are not from California then I suspect they wouldn't be allowed.

In this scenario, it will be stock losses harvested while in the home state.

 

[pb4uski]

Are the off-setting losses from California income or from your home states income ? If they are not from California then I suspect they wouldn't be allowed.

+1, unless you had included stock and related income, etc as California property the whole time (for example, in a California based brokerage account).

I think you're trying to hard to be too cute.