Becoming resident of another country mid year - Selling primary residence

[stephaniemajor99]

We are filing jointly. We moved to another country to retire in May 2023 and will sell our primary residence in California in the future (let's say in 2026). What are the US federal and California tax implications of moving to another country and be resident of that other country for over 6 months in 2023? For US/California tax purposes, do we have to consider we have “sold” our US primary residence in May 2023? What will the US/California tax implications be for selling our US property in 2026?

[MartyG]

Hi Stephaniemajor99,

Let's start with federal law.  As a US citizen (which I presume you both are), you are taxed on all of your worldwide income, no matter where you live for the rest of your life.  So any income you earn in that other country is taxable in the US (subject to earned income exclusions and foreign tax credits). 

Selling your personal residence in 2026 is also problematic.  Your gain on the sale of your personal residence is taxable.  However if you lived in the house for at least 2 years within the 60 months ending with the close on the sale,  you would be entitled to a $500,000 gain exclusion as married filing joint.  So selling in 2026 gets you very close to the edge there.  For California, they are reluctant to give up residency for people moving abroad (as opposed to another state).  But this is moot, as the tax consequences of a sale of a CA house (whether you are taxed as a resident or non-resident) are the same as federal.  

So it is important to sell your house early enough to meet the personal usage requirement for two years of the past five when you sell it.

So in conclusion, you must continue to file US tax returns, and maybe CA also, as long as you live (provided you make enough money that you are required to file).  If you are treating your CA home as a rental property in the interim, you must (for sure) file CA returns (at least as a non-resident) for the rental income and expense.  And when you sell your home in 2026, you must report the gain (and maybe get and exclusion if you meet the test).  I will post more below on what it takes to break residency in CA.

Moving to another country does not make your house "sold" in 5/2023.  Only actually selling it does that.

I hope this answers your question.

Marty

[MartyG]

California residency is tough to break.  A lot depends on your intent.  If you retired and plan to live the rest of your life in this foreign country, have cut your ties with the state, gotten rid of your CA driver's license, etc., then you can probably make a case to CA that your residency ended in 5/23. 

If, on the other hand, you left for an Expat job it gets muddier.  CA has passed a law saying that if you leave for more than 18 months, don't visit for more than 45 days/year, and have less than $200,000 in intangible income, then they wouldn't consider you a resident.

However, sale of your home will always be taxable there (subject to the exclusion discussed in the previous post), no matter when you sell it.  And rental income from the house (assuming you rented it) will always be taxable there too.

Thanks,

Marty