Thinking of Leaving the Bay Area? Be Aware of These Pitfalls

 In Taxes

COVID-19 has accelerated the move to working from home. And WFH has become a permanent reality for many Bay Area companies, including Twitter and Coinbase.

Escaping the Bay Area or California altogether is a hot topic in the news. Many people are leaving the expensive Bay Area. This has led to massive drops in SF rents as of June 2020. California has the highest income taxes in the US. Leaving the state of California altogether would reduce your taxes.

Let’s explore the financial and legal implications of leaving the Bay Area (whether temporarily or permanently), and leaving California.

Temporary Escape From the Bay Area to Tahoe

Some of my clients have temporarily left their small city apartments for the Lake Tahoe region. They’ve found long-term rentals (30 days+) on Airbnb, and they’re very happy for a respite from the “concrete jungle” of the city.

Watch out for Craigslist Scams

One of my clients wanted to test out working remotely from outside the immediate Bay Area. She found what looked to be a promising, month-to-month rental unit in South Lake Tahoe via Craigslist. Unfortunately, it turned out to be a scam, and she lost $2,000 when she wired money to the supposed rental agent.

It turns out the unit was for sale, and the realtor said that the unit had been the source of previous scams. The local sheriff’s office wasn’t able to help her and advised her to file a police report in San Francisco, where she resided. Scam artists are taking advantage of people eager to escape their apartments for more space. Please be mindful of this risk, and share with family, friends, and co-workers.

Permanently Leaving the Bay Area, but Staying Within California

Mark Zuckerberg recently made headlines when he announced that Facebook employees may face pay cuts if they move to cheaper areas. Zuckerberg emphasized the importance of reporting the accurate location of residence for tax purposes. Employees who are not honest with their location and taxes will face severe ramifications from Facebook. You should speak with your employer before you move to ensure they’re okay with you working remotely, and to understand the potential impact on your compensation.

Compensation Cafe, a blog focused on all things compensation, argues that Zuckerberg is wrong about remote pay. It’s unclear whether other companies will follow Facebook’s lead. Google employees recently pushed CEO Sundar Pichai to detail the company’s future remote WFH policy.

The Information (subscription required) published a detailed article on remote workers facing steep pay cuts for leaving the Bay Area. The takeaways from this article include:

  • Software developers outside of the Bay area earn significantly less
  • The Bay Area pay premium sometimes offsets high costs
  • Facebook’s plans stir debate over geography-based pay policies
  • Salaries are determined by formulas based on geographic areas

Based on my conversations with clients at tech companies other than Facebook, it’s unclear whether they will have to take a pay cut for moving to Portland, for example. Remember that base salary is only one component of your compensation. Most large public Bay Area companies, particularly in tech, grant equity compensation in the form of RSUs. Will your future refresher grants be reduced as well if you moved? This is something to consider when deciding whether to move.

Permanently Leaving California

The classic maneuver by wealthy Californian retirees is to tiptoe over the state border and retire in Incline Village, NV in the Lake Tahoe region. State income taxes are a big reason for this: California’s marginal tax bracket tops out at 13.3%, while Nevada is one of seven states that doesn’t levy income tax.

But California and New York are notoriously aggressive about auditing taxpayers who move to a low- or no-tax state. California sets a high bar for you to prove you’ve truly left California.

California’s Franchise Tax Board uses 29 factors to determine whether you’re a resident under California law. This is based on the 1985 case Corbett v. Franchise Tax Board. 

The FTB can even resort to reviewing your Internet searches and credit card charges to see if you’re still going to the same hairstylist and doctor. You need to demonstrate that you’ve truly moved based on the 29 Corbett factors, including:

  • Selling your California home
  • Taking your pets to your new home. The New York Division of Tax Appeals ruled in favor of Gregory Platt, who moved from NY to TX (a no income-tax state). One of the factors was because he took his dog with him to Dallas.
  • Changing driver’s license and car registration (for you and spouse if you’re married)
  • Changing voter’s registration
  • If you need a storage unit, renting it in your new state (NOT California)
  • Filing tax return in the new state
  • Changing your doctor and dentist

Wealthy inventor Gilbert Hyatt moved from California to Nevada. After a 28-year legal battle with California, he was unable to prove Nevada residency: California wins in Supreme Court after 28-year fight with inventor.

Leaving California Isn’t an Escape from California Income Taxes

Leaving California doesn’t mean you’re guaranteed to avoid all California income taxes. Even if you’re able to change your state residency, California can still tax you on all California-source income. This includes:

  • Sales of California property
  • Rental income from California property
  • Stock options that vested while you lived in California
  • Double-trigger RSUs that vested while you lived in California based on the time-based criteria (1st trigger). Even if you leave California when the IPO occurs (when you meet the 2nd trigger), this RSU income will still be subject to CA state income tax.

Legal Considerations for Moving to Another State

Update Your Estate Plan

Your estate plan includes your will and health care document. These documents are state-specific, so if you had documents drawn in California and you move to Washington state, you’ll need to hire an estate planning attorney in Washington to re-draft your estate planning documents.

Update Your Post-nup

If you have a post-nuptial (“post-nup”) marital agreement drawn in California and you move to a non-community property state, you may want to update the post-nup to nullify community property laws. If you have a pre-nup, the agreement should already take care of this. You can read more about this here.

Renters’ Market Emerges: Stay in the Bay Area?

If you want to stay in the Bay Area, the rental market is shifting to favor renters rather than landlords. The vacancy rate in SF jumped from 3.9% in February to 6.2% in May.

Local landlords have been surprised by the volume of lease-breaking. This article reports that 1 in 13 renters in SF has broken their lease since the start of the COVID-19 pandemic, largely members of Generation Z (aged 18-25 years old).

One-bedroom rents in SF have dropped 9% year-over-year as of July 2, 2020 according to zumper.com. But the median rent is still a hefty $3,269 per month. If your lease is ending soon, perhaps you can take advantage of the renter’s market and negotiate lower rent. The SF Chronicle reported the story of Oakland resident Zenab Keita who successfully negotiated a rent cut.

IF YOU’RE LOOKING FOR A TAX-FOCUSED FINANCIAL PLANNER WHO SPECIALIZES IN EQUITY COMPENSATION, SCHEDULE A FREE CONSULTATION.

 

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