Written by Andrew Gradman, Esq

This article describes how individuals who call California home (i.e., who are “domiciled” here) can avoid CA income taxation, in favor of a lower-tax state such as Nevada.

This article is not legal advice. Every person’s facts are slightly different; minor variations can lead to very different results; and it is impossible to discuss all these variations here.

I.                OVERVIEW

There are two ways an individual may owe CA income tax:

  1. If she has CA-source income—for example, income from the rental or sale of real property located in CA.
  2. If she is a CA tax resident. In this context, the word in the tax code, “resident,” does not have its intuitive meaning. I made up the phrase “CA tax resident” to underscore this point. An individual becomes a CA tax resident in either of two ways: by being domiciled here, or by being present here.
    • Having a CA domicile makes a person a CA tax resident, until she acquires a new domicile or is “absent for a long-term purpose.” (That’s also a made-up term. It’s my shorthand for “outside this state for other than a temporary or transitory purpose.”)
    • Mere presence in CA also makes her a CA tax resident, unless she is here for merely a “temporary or transitory” purpose. A person can become a tax resident in this way even if she is domiciled elsewhere. Thus, “residence” and “domicile” are not synonymous. Residence (as a tax term) is more expansive than domicile.

If a person is taxed due to residence, she is taxed on her worldwide income, regardless of source (for example, even if she earns it while performing services in Nevada for a Nevada employer). To report this income, she files Form 540, the income tax return for CA tax residents.  By contrast, if she is a nonresident, she will only be taxed on her CA-source income; she will owe this tax regardless of where she is “present” or “domiciled” (for example: even if she has genuinely moved to Nevada, she will owe CA tax if she sells real estate located in CA). To report this CA-source income, she files Form 540NR, the income tax return for nonresidents or part-year residents.

Most of my clients check both these boxes: They wish to terminate their CA tax residency, which they established both through presence and domicile; and they also have CA-source income. To avoid CA income taxation, they must address both causes.

  1. First, the individual must relinquish her CA tax residency (e.g. move to Nevada and not visit CA with a long-term purpose).
  2. Second, she must avoid income attributable to CA sources.


An individual becomes a CA tax resident by being domiciled here or by being physically present here with a long-term purpose. Thus, to terminate her CA tax residence she must both:

(i)   acquire a non-CA domicile (or be absent for a long-term purpose), and
(ii)  not be present in CA for a long-term purpose.

“Domicile” refers to a person’s one “true, fixed, permanent” home.  Physically leaving CA is necessary, but not sufficient, to change one’s domicile.  According to CA FTB Publication 1031: “A change of domicile requires all of the following: Abandonment of your prior domicile. Physically moving to and residing in the new locality. Intent to remain in the new locality permanently or indefinitely as demonstrated by your actions.”  Thus, change of domicile has both an objective test (physical presence) and a subjective test (intent to remain, as demonstrated by actions).

The hard part is the subjective test—proving one’s state of mind.  The individual continues to “retain[] his CA domicile as long as he has the definite intention of returning here regardless of the length of time or the reasons why he is absent from the State;” he “loses his CA domicile the moment he abandons any intention of returning to CA … with the intention of remaining there indefinitely.” 18 CCR 17014(c).  The FTB won’t simply take your word for it; instead, it will scrutinize your continued ties to CA. For example, in Chapman v. Superior Court, 162 Cal. App. 2d 421 (1958), the court observed: “Petitioner argues that residence (domicile) depends largely upon intention. This is undoubtedly true, but that intention is to be gathered from one’s acts. … the statement that he at all times subsequent to July 1, 1955, intended to remain permanently in Trinidad or some foreign country, did not foreclose the trial court from considering his acts and declarations indicating a contrary intention.”

The regulation starts with a “presumption of residence.” “[T]he type and amount of proof that will be required in all cases to rebut or overcome” this presumption “cannot be specified by a general regulation, but will depend largely on the circumstances of each particular case.” 18 CCR 17014(d).  CA FTB Publication 1031 lists these relevant factors:

  1. Amount of time you spend in CA versus amount of time you spend outside CA.
  2. Location of your spouse and children.
  3. Location of your principal residence.
  4. State that issued your driver’s license.
  5. State where your vehicles are registered.
  6. State where you maintain your professional licenses.
  7. State where you are registered to vote.
  8. Location of the banks where you maintain accounts.
  9. The origination point of your financial transactions.
  10. Location of your medical professionals and other healthcare providers (doctors, dentists etc.), accountants, and attorneys.
  11. Location of your social ties, such as your place of worship, professional associations, or social and country clubs of which you are a member.
  12. Location of your real property and investments.
  13. Permanence of your work assignments in CA.
  14. Impact of COVID-19 pandemic.

Unfortunately this list is not really useful; it is unclear how many factors is “enough.” In fact, in some cases, CA finds that a person is a tax resident based on the failure to satisfy a single factor. Thus, even people who genuinely intend to leave permanently can get caught in the tax net, if their social, business, or family ties to CA can be spun as too strong.  In one article surveying published opinions of CA’s Office of Tax Appeals over the last three years, the author commented that “it is an understatement to say that taxpayers have not fared well so far on the residency/domicile issue at the OTA,” and that these cases “are of little assistance in charting a course for a successful move out of California, because they were so poorly developed in terms of their factual presentations and because of the OTA’s heavy focus on the burden of proof issue. The devil is truly in the details.” https://news.bloombergtax.com/daily-tax-report-state/the-CA-office-of-tax-appeals-looks-at-residency.

Advice on this topic can only be tentative.  Here, for example, is a list of steps from a law firm’s blog, describing steps a taxpayer can take to demonstrate a change of domicile:

  1. Sell or rent out your former principal residence in California as soon as you make the decision to move out of California or as soon as practical.
  2. Retain records of hiring a real estate listing agent or property maintenance firm related to your former California residence.
  3. Do not return to California and attempt to stay at your former residence; stay in a hotel or with friends or family instead.
  4. Do not claim the California Homeowner’s Property Tax Exemption of $70,000 on your county property tax bill after you have moved out of California. The tax impact is $70.
  5. Hire a moving company to move your goods from California to Nevada and retain the bill of lading and invoice related thereto for 7 to 10 years.
  6. Leave nothing in the California residence, particularly school age children; or, leave only the bare essentials for showing your home or renting it out.
  7. Transport all vehicles, RVs, ATVs, motorcycles, boats and aircraft owned or leased by you to Nevada.
  8. Sell all of your golf memberships in California if you can. Retain proof that you tried to sell such memberships.
  9. Find new physicians, dentists, attorneys, accountants, investment counselor, insurance agents in Nevada as soon as possible. Do not visit your former physician or dentist in California after your move unless absolutely necessary.
  10. Reduce your California social ties to the extent possible.
  11. If you retain your California attorney for convenience or out of necessity, e.g., he prepared your estate plan, correspond with him/her via U.S. mail or telephone rather than visit him/her at his/her office.

See Rex Halverson & Associates. https://www.halversontax.com/residency-domicile-issues.

I agree with most of this advice.  (Personally, I think that renting one’s CA residence is risky; it suggests an intention to return to the property.)  However, the author of this article was also right to frame the advice in tentative terms:  He prefaced his advice by stating that these steps “will aid in proving their domicile has changed” (emphasis added).  In short, nothing is certain.  We can’t be sure whether the FTB will respect a change of domicile, unless a person completely severs all his ties to CA, a concept which is only attainable in theory.

If a person cannot show she has changed her domicile, her final hope is to show she was absent from CA for a long-term purpose. For example, in Whittell v. Franchise Tax Board, 231 Cal. App. 2d 278 (1964), the court noted that, although the family moved from CA to Nevada, “a domicile in Nevada is not irreconcilable with the existence of tax liability in this state;” the family’s activities in CA made it “abundantly clear that their presence here was neither temporary nor transitory.”

However, if a person cannot prove a change of domicile, they will probably have a hard time proving absence for a long-term purpose.  This is because both tests (domicile and presence) take into account similar factors. This is illustrated in the list of factors from FTB Publication 1031, quoted above. These are described as factors used “to help determine your residency status;” it does not explain which residency test these relate to, i.e. domicile or long-term presence.

However, there is one safe harbor.  A person will be deemed to be absent for a long-term purpose, and thus not a tax resident, if she is absent

(i)   for an uninterrupted period of at least 546 consecutive days (disregarding up to 45 days in CA per year),
(ii)  under an employment-related contract,
(iii) if she does not have income from intangible property (including stocks and bonds) in excess of $200k in any year in which the employment-related contract is in effect, and
(iv) if the principal purpose of her absence from CA is not to avoid CA tax.

Query whether this safe harbor is really a safe harbor, since CA can always make the amorphous claim that the taxpayer’s absence had a principal purpose of avoiding CA tax.

III.           SOURCE

The second basis for CA taxation is CA source. Even if an individual is not a CA tax resident, she must report her CA-source income on a nonresident tax return, Form 540NR. CA source income includes:

  • Income from real property, or personal tangible property, located in CA.
  • Income from a business, trade, or profession carried on in CA.
  • Income from personal services performed in CA.

The rule for real property is the simplest:  The sale of CA real property will trigger CA taxes.  However, this rule also suggests an opportunity.  If the taxpayer does a 1031 exchange into real property in Nevada or Texas, then when that property is later sold the gain will not be subject to CA tax.  Unfortunately, CA understands this, and so it is more stringent than the IRS in how it interprets the rules relating to like-kind exchanges.

The rules for businesses, trades, professions, and services are harder. For example, consider services performed outside CA. Generally, the wages and salaries will have a non-CA source. See Publication 1031. However, if the services were performed as part of a business, trade, or profession which operates in CA, then they will be CA-sourced. See In the Matter of the Appeal of Blair S. Bindley – CA OTA Case No. 18032402 – 05/30/19.  There are also various subtle rules which are too complex to discuss in this article—e.g., “unitary businesses” which cross state lines; apportionment of business income; allocation of non-business income; distributive shares of partnership income; pro rata shares of S Corp income; and income from professions. See 18 CCR 17951-4 and -5.

Intangible property is easier to work with.  Generally, income from intangibles is sourced to the location of the owner. This category includes stock (in C or S corporations); LLC membership interests; and partnership interests.  See Appeals of Amyas and Evelyn P. Ames, et al. (87-SBE-042).  As a result, business owners are good candidates for emigration:  If the taxpayer sells stock or other ownership interests after successfully terminating her CA residency (for example, by moving to Nevada), the income will also not be CA-sourced.

While the rules for intangibles can be generous, there are exceptions. For example, income from intangible property will be CA sourced if the intangible acquired a business or tax “situs” in CA; see RTC 17952.  Thus, each case must be analyzed on its own facts.


What if the taxpayer cannot change domicile in time for the sale of the shares?  Moving is hard.  Unless the taxpayer’s whole family is enthusiastic about the move, they will be tempted to maintain their CA ties, which the FTB may use against them.  Changing neighborhoods, selling one’s home, changing schools, burdening friendships, creating new ones—the cost to happiness may be more than the tax cost.

If moving is not an option, the next best solution is to transfer the shares to a person who resides in a low-tax state. One way to do this is by making a gift to a family member. This is rarely done, because it has the potential to be either abusive or self-defeating. (Who would give away their wealth—even to a family member—unless it was a sham?) A more sophisticated solution is to create a new legal person—a trust.  If the trust is based in Nevada, it is commonly called a “NING” (Nevada Incomplete-gift Non-Grantor Trust).

A NING can have CA beneficiaries and a CA grantor, while still avoiding CA taxation.  To achieve this, it is structured as an irrevocable, nongrantor trust.  The trustees must reside and manage the trust from outside of CA. These trustees must have full discretion over when to make distributions to the CA beneficiaries (although the beneficiaries do have a limited role in these decisions, in that they can veto distributions).

As long as the assets stay in the NING, and as long as the income is not CA-sourced, the NING avoids CA taxation.  However, distributions to a CA tax resident are included in that person’s CA taxable income. Thus, the value of a NING is limited.  A NING will not convert CA income into non-CA income.  It merely delays imposition of tax on the beneficiaries.  At a minimum, the value of the NING is that it allows sales proceeds to be reinvested and grow for some time without CA taxation.  At best, the NING buys the family some time to later change their domicile to a lower-tax state.

NINGs are complex.  They are also controversial:  The CA FTB has proposed legislation to shut them down effective 2022.  See https://www.ftb.ca.gov/tax-pros/law/regulatory-activity/lp-c.pdf. Thus, the concept should be discussed with a specialist.  The client must also consider her own comfort level with the arrangement.