Moving Out of California Before Selling Startup Shares

Does California tax my startup shares if I move before the sale?

Not if you are truly a nonresident on the sale date. The California Franchise Tax Board (FTB) says a gain on stock has its source where you are a resident at the time of the sale, so a nonresident's gain on California company stock is not California income (FTB Publication 1031). Pay is different: it is sourced where you did the work, so moving does not take it out of California.

What makes a case not simple: a home, spouse or children still in California; a move made weeks before closing; options or unvested shares; money paid out after closing; or a new state with its own tax. California will not issue a written opinion on whether you are a resident, because residency is a question of fact (Publication 1031).

Gather: a day-by-day log of where you were, the sale or lease of your California home, your new lease or deed, driver's license, vehicle and voter registration, children's school records, and your grant, vesting and exercise history.

What makes me a nonresident: domicile and closest ties

You stop being a California resident when your closest connections are elsewhere and you are out of California for more than a temporary or transitory purpose. A California domiciliary who is away only temporarily stays a resident (Publication 1031).

California separates two ideas:

• Domicile is your true, fixed, permanent home, the place you intend to return to. You have only one. Changing it takes all three: abandoning the old one, physically moving to and living in the new place, and intending to stay there permanently or indefinitely, shown by your actions. Keeping a marital home in California is a significant factor for California domicile.
• Residence is where you are for other than a temporary purpose. You are presumed a resident for any year you spend more than nine months in California.

The FTB compares your ties to California with your ties elsewhere, and the strength of the ties counts more than their number. No one factor decides it. The factors it lists:

Declaring a new state is not enough. In an FTB example, a person who declared Nevada residence but kept a California home and spent six or seven months a year there remained a California resident.

California's 546-day employment safe harbor rarely helps here. It treats someone working outside California under an employment contract for at least 546 consecutive days as a nonresident, unless their intangible income, such as stock gains, exceeds $200,000 in any year the contract is in effect, or the main purpose of the absence is to avoid tax (Publication 1031).

How long before an acquisition or IPO should I leave California?

There is no safe number of days. The rule the FTB states is that you must already be a nonresident when the shares are sold, which means the move is finished, not planned. A move made after the deal terms are agreed, with a California home still waiting, invites the question whether the absence was only temporary.

What a finished move generally looks like before the sale date, measured against the FTB's factors:

1. The California home is sold, or leased to someone else on a long lease, and you live in a home in the new state.
2. Your spouse or partner and children have moved, and the children are enrolled in school there.
3. License, vehicles, voter registration and professional licenses have moved.
4. Doctors, banks and memberships have moved, and your days in California are visits.

The longer you live this way before the sale, the more the facts speak for themselves. Washington states the same principle plainly for its own tax: a person who intends to move at a future date is still domiciled where they are now (Washington DOR).

Does California tax stock options and RSUs after you move?

Yes, to the extent the pay was earned by work in California. The FTB treats the income as compensation for services, sourced where you performed them, whether you exercise or vest before or after the move (Publication 1100; Publication 1004).

If all your work from grant to exercise or vesting was in California, all of the pay part is California income. Moving does not convert an option spread into a gain on shares. If you leave the job as well as the state, see exercising options when you leave a startup.

The new state may also tax the same pay as a resident. Any credit for the double tax generally has to come from the new home state, under its own rules: California's Schedule S credit is open to nonresidents only if they live in Arizona, Guam, Oregon or Virginia (Schedule S instructions).

Does California tax escrow or earnout money paid after I leave?

If you sold while a California resident, California keeps taxing the gain in later installments, even after you move. The FTB sources installment gains from intangible property, such as stock, to your state of residence at the time of the sale. The interest part of a later payment is not California income once you are a nonresident (Publication 1100).

The reverse also holds: if you sold after becoming a nonresident, later installments of that gain are not California income while you stay a nonresident. An earnout that is really pay for staying on is compensation, sourced where you work. For federal timing, see escrow and holdback payments and earnout payments.

What do I file for the year I move out of California?

File Form 540NR, California's nonresident or part-year resident return, for the year you move (540NR booklet). As a part-year resident, California taxes all your income while a resident, and only California-source income after the move. Schedule CA (540NR) splits the year.

The tax is figured at a rate based on all your income for the year. California computes tax on your total income as if you were a resident all year, divides by that income, and applies the rate to the California part (Publication 1100). A large sale after the move is not taxed by California, but it can raise the rate on the California part of that year.

In later years, you may still need a 540NR if you have California-source income, such as option or RSU pay for California work, and your income is above the filing threshold (FTB). If the new state has an income tax, file there too, as a resident from the day you moved.

What records hold up in a California residency audit after moving?

Records made at the time, matching the FTB's own factors, are the ones that count. Residency is decided on facts, so you prove the move with dated documents rather than a statement of intent (Publication 1031).

• Days: a calendar showing where you slept each night, backed by travel records.
• Home: the closing statement or lease for the California home; the deed or lease in the new state.
• Family: school enrollment, and where your spouse or partner lives and works.
• Paperwork: dates of the new driver's license, vehicle registration and voter registration.
• Money and people: when bank, medical and professional relationships moved.
• Work: where you worked each day from each grant to each exercise or vesting date, for the workday split.

Keep them for at least the FTB's usual window to propose more tax, 4 years from the due date or filing date. A longer window can apply, including when omitted income is more than 25% (FTB).

Is the new state better: Washington, New York, or a state with no income tax?

It depends on the new state's own rules, and some tax a share sale fully. Check the destination before you move, not after.

States differ on gain excluded federally as qualified small business stock (QSBS); Washington does not tax it (DOR FAQ). See state tax on QSBS gains.

Does moving change my federal tax or QSBS?

No. Your federal tax on the sale, and whether your shares qualify as QSBS, do not depend on which state you live in. What changes is only whether a state follows the federal exclusion. See QSBS for founders and early employees and taxes when your startup is acquired.

Example

These examples are illustrative; all figures are in US dollars.

Shares sold after a real move

Year 1: A founder whose founder shares are fully vested sells her San Francisco home and moves her family to Texas. Her children start school there, and she changes her license, car and voter registration. She files a California 540NR for the part of the year she lived there.

Year 2: Eighteen months after the move, the company is acquired and she has a $5,000,000 gain on her shares. If she was no longer a California resident on the sale date, the gain is not California income. She keeps her day log and move records in case the FTB asks.

Options stay behind

An early employee holds nonstatutory options and works only in California from grant until he leaves the company. He then moves to Washington and exercises with a $400,000 spread. California taxes the full spread as California-source pay, because all the work behind it was in California. Washington's capital gains tax does not apply to pay.

Escrow after the move

Year 1: A founder closes the sale of her shares while still a California resident, reports it under the installment method, then moves to Florida.

Year 2: $1,000,000 of escrow is released. Because she was a California resident when she sold, California still taxes the gain in the release. Any interest paid with it is not California income once she is a nonresident.

Different for you?

• Your gain may be QSBS: see which states still tax it in state tax on QSBS gains.
• You get cash and buyer stock in the deal: see taxes when your startup is acquired.
• Part of your price is in escrow or an earnout: see escrow and holdback payments and earnout payments.
• You are leaving the job and have a window to exercise: see exercising options when you leave a startup.
• You are moving between Canada and the US with stock awards: see stock awards and pay after a move.
• You also want to move the company: see moving your company to another state.
• You keep a California home, family stays behind, or the sale is close: these turn on facts California weighs case by case; get individual tax help before the sale date.