Thinking of Leaving the Bay Area? Be Aware of These Pitfalls
Escaping the Bay Area or California altogether has been a hot topic in the news. In 2020, many people left the expensive Bay Area, which led to massive drops in SF rents. I was interviewed on KQED Forum in September 2020 on this topic (I come in at the 37:18 mark). But a July 2021 study by the University of California finds that the “California exodus” isn’t real. For example, of the people who left San Francisco, two-thirds stayed in the Bay Area, and 80% remained in California, which is consistent with pre-pandemic migration patterns.
The UC study found that younger Americans (25-39) are moving at higher rates, however. Perhaps you’re considering leaving California. After all, the delta variant is upending companies’ plans to return to the office. Some Bay Area companies have already shifted to a permanent WFH policy. And California has the highest income taxes in the US, so leaving the state would (seemingly) 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
Wildfire season might make Lake Tahoe less appealing. But a few clients temporarily left their small city apartments for Lake Tahoe in 2020, living in long-term rentals that provided a welcome respite.
One of my clients 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. These scams may be less prevalent compared to 2020, but be aware.
Permanently Leaving the Bay Area, but Staying Within California
Mark Zuckerberg 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. 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
Some companies are finally announcing their compensation policies for employees who leave expensive metro regions like the Bay Area. Based on my conversations with clients, pay cuts only apply to base and bonus, but not RSUs. Remember that your equity compensation is also a key component of your total comp. Ask your employer if future refresher grants will be reduced if you 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 nine states that don’t levy an 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 moved based on the 29 Corbett factors, including:
- Selling your California home
- Updating the address on file with your employer
- 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, dentist, etc
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.
You Might Still Owe California Income Taxes
Leaving California doesn’t mean you’ll avoid all California income taxes. Even if you’re able to change your state residency, California will 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 before the IPO occurs (when you meet the 2nd trigger), a portion of the 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, and it’s best to hire an estate planning attorney in your new state. Share a copy of your California estate planning documents with your new attorney.
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.
IF YOU’RE LOOKING FOR A TAX-FOCUSED FINANCIAL PLANNER WHO SPECIALIZES IN EQUITY COMPENSATION, SCHEDULE A FREE CONSULTATION.