tax impact of moving from WA to CA

[lynnqu]

Hello tax experts and enthusiasts, my parents are planning to move from Washington state (where there is no state income tax) to California sometime in 2022 in order to be closer to their grandson.  They are in their 70s and a significant part of their retirement savings is in IRAs, they also own a home in WA that they plan to sell.

There are two questions around tax impact of moving from WA to CA, for which there does not seem to be a clear answer (i.e. after extensive Googling)

1. Tax hit on Roth conversion: if they convert (deductible) Traditional IRA to Roth IRA in March in WA, and they move to CA in October of the same year, will they have to pay CA state tax for converted traditional IRA?

2. Capital gains tax on selling the WA home: should they wait until the completion of the WA house sale before moving to CA, so that they don't pay CA state tax on the home sale capital gains?

Would love to hear relevant experience and insights, thank you!

[Critter-3]

1. Tax hit on Roth conversion: if they convert (deductible) Traditional IRA to Roth IRA in March in WA, and they move to CA in October of the same year, will they have to pay CA state tax for converted traditional IRA?  No ... they will file a part year CA return to allocate the income to each state. 

2. Capital gains tax on selling the WA home: should they wait until the completion of the WA house sale before moving to CA, so that they don't pay CA state tax on the home sale capital gains?  That would be wise if they can manage to do it. 

[Opus 17]

As residents of a state, taxpayers must report and pay income tax on all their world-wide income that they receive while a resident of the state.

Residency is determined by your domicile.  Your domicile is your permanent, "true" home.  You can only have one domicile at a time, even though you might have several homes you stay in.  Domicile is determined by analysis of all relevant factors and it includes things like home ownership or lease, but also where your closest family and friends are located, your doctor and dentist, significant social relationships like your church and blowing league, voter and vehicle registration, and so on.  When you change domiciles, you must take active steps to establish a new domicile AND you must take active steps to abandon your former domicile.

You can read more about California's take here.

https://www.ftb.ca.gov/file/personal/residency-status/part-year-and-nonresident.html

Your parents would owe California income tax on the sale of their home if they closed on the sale after establishing their domicile in California. 

To minimize the risk of California being able to claim that your parents established a new domicile before the sale, your parents should probably not only not move to California, but should not sign a lease, close on a house or change their voter and car registrations until after the Washington house is sold.

HOWEVER,

California follows the Federal rules for excluding capital gains on the sale of your main home.  If your parents have owned their present home at least 2 years, and lived in it as their main home for at least 2 of the past 5 years, they can exclude the first $500,000 of capital gains from taxation.  If their gain is less than $500,000, it would not be taxable in California even if they did not close on the sale until after they moved.

https://www.ftb.ca.gov/file/personal/income-types/income-from-the-sale-of-your-home.html