Introduction
Thinking about moving out of California to save on taxes? You’re not alone. But before you pack your bags, there’s a lingering myth you’ve likely heard: the “California Exit Tax.” While the concept is often misunderstood, it’s very real for certain taxpayers—especially high earners and business owners.
What Is the California Exit Tax?
Applicable Code: California Revenue & Taxation Code §17591; IRC §877A
California does not currently have a formal “exit tax” like the federal government. However, the state continues to tax residents who move out if they:
- Maintain California-source income
- Retain domicile or connections in California
- Sell appreciated assets shortly after leaving
- Move but never sever residency under FTB guidelines
In essence, California will still tax you if they consider you a resident, even if you’ve physically left.
Why It Applies to Former Residents
California taxes based on residency, domicile, and source of income.
If you:
- Keep a home or mailing address in CA
- Vote or hold a CA driver’s license
- Own an LLC or S-Corp doing business in CA
…you may still be considered a resident and owe taxes even after you’ve moved.
Exit Tax & Covered Expatriates Explained
While California has no statutory exit tax, the federal government does under IRC §877A, which applies to U.S. citizens or long-term residents who renounce citizenship or green card status.
It treats them as if they sold all assets the day before expatriation and taxes gains over a certain threshold ($866,000 in 2024).
If you’re a California resident who also expatriates, you could face both residency audits and federal exit tax exposure.
High Net Worth and California Residency Rules
| Residency Factor | Risk of Continued Taxation |
|---|---|
| Home in California | High |
| CA LLC/Corporation | High |
| Frequent CA travel | Medium |
| Out-of-state home but CA mailing address | High |
| Full relocation & asset transfer | Low |
California uses a “facts and circumstances” test to determine residency. Just having a home in another state isn’t enough.
Legal Strategies to Avoid or Minimize Exit Tax
- Sell appreciated assets after establishing out-of-state residency
- Change your mailing address, license, and voter registration
- Terminate CA LLCs or corporations or move operations
- Avoid part-year residency filings unless required
- Document your move clearly and legally
- Consider timing of income recognition
- Engage with a CPA before your move
Step-by-Step Guide to Exit Without Penalties
Step 1: Plan your move for January to avoid dual-year complications
Step 2: Establish clear and legal domicile in another state or country
Step 3: Change all official documents (license, voter reg, mailing address)
Step 4: Close or transfer California-based businesses or operations
Step 5: Sell or rent out your California home
Step 6: File a final part-year return (Form 540NR) and pay any remaining tax
Step 7: Document everything—intent matters in FTB audits
Conclusion
California’s exit tax is not a formal statute, but it can cost you thousands if you fail to properly sever residency. If you’re a high-income individual or business owner considering a move, planning your exit is essential to avoid unwanted audits, tax bills, and penalties.
Call to Action
Leaving California soon? Don’t do it alone.
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed Certified Public Accountant and Enrolled Agent who helps business owners and high-net-worth individuals legally exit California with full compliance.
📅 Book your appointment here
FAQs – California Exit Tax
Q1: Does California have a formal exit tax law?
No, but the Franchise Tax Board (FTB) may still tax you if you don’t cut residency ties properly.
Q2: How do I prove I’m no longer a California resident?
Change your address, license, voter registration, and cut all business and personal ties.
Q3: Can I keep my California LLC if I move?
Yes, but your LLC will owe California taxes, and you may be considered a resident for income earned.
Q4: When should I sell assets if I’m planning to move?
After you’ve become a legal resident of another state, to avoid CA capital gains tax.
Q5: What happens if I get audited by the FTB?
You may be required to pay back taxes, penalties, and interest—make sure your move is well-documented.
About Our CPA
Anshul Goyal, CPA EA FCA is a Certified Public Accountant licensed in the U.S., Enrolled Agent authorized to represent clients before the IRS, and Fellow Chartered Accountant. With over 15 years of experience and more than $200M in client tax savings, Anshul advises clients on residency planning, cross-border tax, and high-income relocation strategies.
Disclaimer
This article is for informational purposes only and does not constitute legal or tax advice. The concept of an “exit tax” is complex and varies by federal and state law. Please consult with a qualified CPA or legal advisor before making decisions related to tax residency or relocation.