Big Gains

Today TaxMama hears from Marty in Calif., who relates. “I own a piece of land in Florida that I own free and clear and now have up for sale (as of Jan. 1, 2006) and the listing price is $5.74 million. It was valued at $426,000 when I acquired it several years ago.

A financial advisor suggested that I move to an income-tax-free state like Nevada (I live in California) to avoid being taxed here when the land sells. Does that make sense and is that legal to do?

In addition, I’d rather take the capital gains tax hit now while it is relatively low, rather than wait until it might go up. Does that make sense, in your opinion, to do that?”

Hi Marty

What a happy problem to have!

Let me address your first question. California.

If you sell that property while you are a California resident, your FTB taxes will be 9.3% on all the profit – or nearly $500,000!

Were I in your shoes, I’d take the land off the market. I’d move to Florida, Nevada or Texas immediately. (Alaska, Washington, Wyoming and New Hampshire are too cold. Though Tennessee may be interesting. )

I’d stay out of California, changing my voter registration, driver’s license, bank accounts, etc. I figure it’s worth the inconvenience to save half a million dollars. Besides, you may just like the convenience and lower cost of living in a more tax-friendly state.

Oh yes, remember to remove your personal residence exemption from your home, if you decide not to sell it. And don’t rent it out. That way, you won’t have any rental income to report – so there won’t be a need to file a California non-resident tax return at all.

(As to the number of days you can visit Calfiornia, without them trying to tax you as a resident? I don’t know. But I’d keep it under two weeks.)

As to the question of paying capital gains now, at 15% or running the risk that the tax rate will go up later and doing a 1031 exchange? I’d agree with you. Even if you pay the tax on a current sale, you’d walk away with about $5 million clear after paying IRS. Of course, if you stay in California, there’s goes another half mil.

Remember, you’ll find answers to questions about capital gains and all kinds of tax issues, free. Where? Where else? At TaxMama.com

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