Move Co to Ca: Sell CO rental first b4 CA taxes it?CPA/RE lawyer?

Question

I own a rental in CO (over 5 years definitely classified as 'investment property'). I may be moving to CA soon.

I have plans to sell the CO rental in the next few months.

From what I have read, it appears that it's better to do this BEFORE I am a resident of CA. If I move to CA and THEN sell the CO rental, I think CA taxes me on 'global income', which means whatever I get off the sale can be taxed or partially taxed, in addition to Colorado taxing me on it. I am in a high tax bracket. (I MAY do a 1031 exchange, but let's assume that I am not able to find something I want to exchange into, for now).

Am I right on this?

I would like to ask someone who will be able to answer this clearly. Do I ask a CPA? Do I ask a RE Lawyer, or is that overkill? I would like to find a CPA who I feel is better with rentals,1031 exchanges, etc. I have not gotten a clear answer, and am unsure who the right person is to call. I am somewhat of a rookie- not an experienced landlord or investor (yet).

Thank you for your time.

Basit Siddiqi · Answer

@Tara G.If you must get rid of the CO property - as you suggested - It may be more advisable to sell the property while you are a resident of Colorado.Colorado's state income tax rate is flat at 4.63%California's state income tax rate ranges from 1% to 13.3%This is just a rough calculation of what your tax would look like under both scenarios if you are single making about $150,000 and sold the property for a $100,000 gain.Sale of property while living in Colorado

$100,000 x 4.63 = $4,630 tax Due to ColoradoTotal Tax paid = $4,630Sale of Property while living in California$100,000 x 4.63 = $4,630 Tax Due to Colorado$100,000 x 9.3% = $9,300 Tax less taxes paid to Colorado of $4,630 = $4,670

Total Tax Paid = $9,300

Difference = $4,670Again this is just a rough estimate - exact calculations are a little bit more complex.

Phillip Bicker · Answer

You are partly correct. While you will not face a double tax for being in both California and Colorado, you will, in essence, be taxed at the higher tax rate (likely California).

What happens: if you are a California resident when you sell, you will be taxed by Colorado and will pay Colorado rates. You then have to file in California and get a credit for the amount you paid to Colorado (essentially just paying California rate). If you sell while you are a Colorado resident, you can do a part-year resident filing for both states and just pay Colorado rates.

Vlad K. · Answer

@Tara G. Hi Tara, as someone who specializes in multi-state tax, I think it is a good idea to sell the property and finalize the sale PRIOR to the move, but only if you can sell the property at a gain, otherwise you want to sell that property after the move to CA.

Also, after the move, please make sure that you properly document your move with the CA, by completely filing Sch CA.

Please feel free to reach out with any questions.

Thomas Rutkowski · Answer

CA residents can deal with the high appreciation and high capital gains taxes by introducing to someone who can do a Monetized Installment Sale. This allows you to get cash at closing and 30 years of tax deferral. With this strategy you don’t have to worry about the tight 45-day timeline to identify a replacement property as with a 1031. And with cash, you have the freedom to shift your investments into a protected position, like private lending.

If you just keep this knowledge in your back pocket, you don't need to sell the property if you don't want to. Just know there is a way to defer the high CA taxes if and when you do decide to sell.

I'd highly recommend a tax attorney over a CPA. This is a question of tax law.

Hope this helped!

Christopher Smith · Answer

The above comment (getting a credit on your CA return for CO taxes paid) is generally how it works. However, if you are in a high income bracket, I would run proformas for both Federal and State under each possible scenario. There are just too many potential variables to rely on general concepts on how you could be affected if you go this way or that. Do you currently utilize a software package to file your returns? Some are sophisticated enough to allow you to run proformas for the next year.

Dave Foster · Answer

@Tara G., Yah, bad CPA - lazy CPA.  1031s are nothing crazy difficult.  You just need to pay attention to dates and amounts - something every successful investor usually does anyway.  And you have a guide - the QI lighting the correct path as you go.  So don't be skittish of them.

One thing to be aware of though is that if you're 1031ing into CA that is akin to waking into the lair of the bear.  CA is I believe the second highest tax rate for capital gains in the world when considering the top CA rate plus federal.  And to make it worse there is a claw back provision so that even if you later 1031 out of the state of CA you must provide annual reporting of that property.  And if you ever sell without a 1031  you will be liable for some CA tax on gain attributed to the time you owned the CA property - even if the property is in another state entirely.

So, as others have said, selling now before you are a CA resident will save you money even if you don't do a 1031.  Doing a 1031 obviously shelters all tax now but will place you in the grips of the CA claw back.  Depending on your model it still may very well be worth doing.  But something to consider in your proformas.

Tara G. · Answer

@Basit Siddiqi  You are exactly right; that is what I got out of the help here, some research, and confirmed further by you.  I have decided on selling BEFORE I am a 'resident of CA'! I love the number layout, as I did my own rough version and can see the methods are the same.  So, thank you for taking the time to do that, I appreciate your time!@Logan Allec It wasn't so much tax advice on doing a 1031 (though I did have questions there); it was more the property sale should I not be able to do a 1031, and how I would be taxed between the two states as a CA resident.  Thank you for you time!  I had a CPA tell me that a 1031 was very complicated for taxes, though, and I learned quickly that was not the case!

Tara G. · Answer

@Phillip Bicker @Thomas Rutkowski @Christopher SmithTHANK YOU all for replying!  I am a bit mortified that I did not realize you all had answered me.  I need to set up alerts so that I know I have replies- this is no excuse; I should have checked back more.  I am so sorry that I did not thank you for your informative and timely answers.I delayed the sale of my condo and the move until this Spring.  I will be sure to sell the condo before becoming a Ca resident if I can.  The information on Monetized Installment Sale is something I will be researching; thank you for alerting me to such a thing; it may be a powerful tool should I need it.   I do not do my own taxes, and don't have a very simple way to run scenarios.  Understandably, my CPA is a bit buried as he learns the new tax laws.  I will be consulting a tax attorney for further!Again, THANK YOU.  I appreciate the time you took to share your expertise!  I am changing those alert settings this minute!

Move Co to Ca: Sell CO rental first b4 CA taxes it?CPA/RE lawyer?

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