5 Misconceptions about Moving Out of State

For high-net-worth and ultra-high-net-worth individuals and families, minimizing income tax can be an important aspect of wealth management. What may often come to mind first regarding tax-efficient strategies is investment planning, such as taking advantage of the preferential tax treatment of long-term capital gains and qualified dividends, as well as making use of retirement accounts to defer or eliminate certain tax burdens.

But there are also other actions you may consider taking to reduce your taxes. For instance, what seems to be a growing trend among the ultra wealthy is moving out of high-tax states like California and New York and residing in low- or no-income tax states like Florida and Nevada. Over time, saving substantially on income taxes may provide a substantial boost to total net worth. As an example, over the past decade, the number of millionaires choosing to reside in West Palm Beach, Florida has more than doubled, and the city now ranks fourth globally for growth in millionaire residents.¹

Two key drivers of making the move to lower-tax states

So, what’s causing this acceleration of families of wealth seeking to change domiciles? There could be any number of reasons, but here are two notable contributing factors:

First, the Tax Cuts and Jobs Act of 2017 eliminated the ability of many wealthy individuals to deduct state income tax, making it particularly painful from a tax standpoint to continue living in states with high income taxes.² Second, the COVID-19 pandemic prompted many people to reevaluate how they want to live – and where. The answer for many has been to move to a low or no income tax state that suits their lifestyle while also generating a financial benefit.

To be sure, changing domiciles is a topic that tends to come up more frequently among wealthy families, especially those who are approaching a potentially significant taxable event, such as selling a business. However, many misconceptions persist about changing your state of domicile. What follows are five common misconceptions and the realities behind them:

1. To qualify as a resident, I must spend at least half a year plus a day in a low-income tax state.

That is false, likely a result of misunderstanding the rules. Rather than focusing on where you are, focus on where you are not. It’s more important to spend less than half a year in the state in which you don’t want to be domiciled, than it is to spend more than six months in the state where you do wish to live. For example, let’s say you want to move from New York and reside in Florida. If you spend five months living in New York and then three months in Florida, plus another four months traveling through Europe, you could qualify as a Florida resident, even though you didn’t live there for more than six months of that particular calendar year. As long as you went through the necessary steps to treat Florida as your true home, you’d be considered a Florida taxpayer, even though you spent less than half a year there.³

2. When it comes to investigating (or auditing) residency, all state auditors are the same.

That’s also untrue. The discrepancy in how aggressively different states pursue residency audits can be significant. For example, states like California and New York have triggering rules that may result in an aggressive audit, whereas other states are far more lenient.⁴ It’s important to know how aggressive the state you plan to leave – or at least no longer domicile in – might be when determining the likelihood of an audit. For instance, moving out of a state before you sell a business could still result in a sizable taxable event in certain circumstances (refer to the next myth).

3. If I sell my business after moving to another state, I won’t need to pay taxes on the sale in my former state of residence.

Well, it depends on what you’re selling. If you are selling certain “assets,” they might have a “home” for tax purposes. In the tax world, it’s referred to as having a tax “nexus.”⁵ Things like property, real estate and equipment all have a state of residence. But “equity,” such as stock or a partnership interest, doesn’t have a so-called “home.”⁶

For example, if you own a real estate business and move from one state – let’s say California – to  Nevada and then choose to sell, you’d likely still owe California income tax on the sale. Although you may no longer live in California, your business still “lives” there in the eyes of the state auditors. Alternatively, if you own stock in a company that’s headquartered in California, and you sell that stock after living in Nevada for two years, you would not owe California income tax, as securities generally don’t have a tax nexus. So, the tax consequences depend on the type of asset you plan to sell.⁷

4. If I continue living in my high-income-tax state, it won’t make much difference financially.

The reality is that the long-term impact of reducing or eliminating state income taxes by moving to a low or no income-tax state could amount to millions of dollars for wealthy families over the span of many years.⁸ In the long haul, the power of compounding by saving 5% to 10% annually on state income taxes is  a big deal for high-net-worth individuals who are focused on preserving and growing their family wealth.⁹

5. If I “bend the truth” a bit about where I reside, nobody will ever find out.

Please don’t try this – ever. Today’s advancements in technology make it much more difficult to mislead state auditors about where you’re actually living. For instance, simply having a cellphone makes it easy for states to monitor where you are, in order to establish your residency. All an auditor needs to do is observe the ad history on your phone or look at the cookies in your web browser to determine where you’ve been at any point. They also have other avenues and techniques at their disposal to discover where you’ve been living. In other words, it’s much harder now to get away with trying to “trick” the auditors as it relates to establishing residency.¹⁰ Be honest and straightforward. Doing so will likely make any potential audit much less painful, while you and your family will sleep better at night.

If you’re thinking about moving to a lower-tax state, a Corient Wealth Advisor can help you think through the potential financial impact before you take the big plunge.

¹ https://www.newsweek.com/florida-city-millionaires-west-palm-beach-2057922
² Details and Analysis of the 2017 Tax Cuts and Jobs Act - Tax Foundation
³ Florida Residency: Requirements and Steps - Alper Law
⁴ Basics of State Tax Residency Audits
⁵ Tax Nexus: What Is It?
⁶ How Does Home Equity Tax Work for Deductions and Limitations? - Accounting Insights
⁷ Understanding Tax Planning for Asset Sales - Attorney Aaron Hall
⁸ Number Of Flat And Zero Income Tax States Grows As 2025 Begins
⁹ 10 Tips For Investors To Grow Their Money Using The Power Of Compounding - Market Realist
¹⁰ State of Residence for Tax Purposes: How To Avoid Double Taxation

ABOUT THE AUTHOR