Using your California address on your in-laws' federal tax return does not make their investment income California source income if they don't actually live in California. They do not have to file a California tax return. However, using that address makes it look like they live in California, and the IRS does share information with the states. At some point they will almost certainly get a letter from the California Franchise Tax Board saying that they are California residents and have to file a California tax return. They will have to answer the letter with an explanation of the situation and give their actual foreign residence address, the date that they moved there, and where they moved from. It would probably make a more convincing case if they mail the response from where they are actually living.
Obviously it would avoid future problems if they use their actual foreign address on future federal tax returns. They could also file a change of address (Form 8822) with the IRS now, instead of waiting until they file their 2020 tax return next year. The "convenience" of having IRS mail go to your address might not be worth the inconvenience of having to repeatedly convince the FTB that they don't actually live there.
