Moving to another state can bring about some serious logistical, interpersonal, and even financial challenges.
Uprooting family and leaving the comforts of a longtime home is often stressful. Navigating a new environment and establishing yourself and your family with all new service providers, schools and friendships can feel a bit overwhelming.
There also may be tax consequences associated with your move. If you sell an asset for profit, you’ll likely generate capital gains taxes. In this article we’ll discuss some of the tax implications of capital gains and how they are treated when you move from one state to another.
What are Capital Gains
Anytime you sell an investment asset for more than its original cost, you’ll have to pay capital gains taxes on the profits. Capital gains are usually tied to investment assets, such as stocks or real estate, though they can be realized on other assets, such as luxury vehicles, fine art, jewelry, collectibles, cryptocurrency, or your primary residence.
Capital gains are classified as either short-term (held for less than 12 months) or long-term (held for a year or longer). Short-term capital gains are taxed at your nominal tax rate, while long-term gains are taxed at either 0, 15, or 20 percent depending on your adjusted gross income and tax filing status. Capital gains are only triggered when you sell an asset for a profit – if you have highly appreciated assets but choose not to sell them, the increases in price are considered unrealized gains.
How are Capital Gains Assessed When You Move?
Determining your capital gains tax liability when you move largely depends on the type of asset you divest and where you live.
There’s a federal exclusion on the sale of primary residences (Section 121) of $250,000 for single filers and $500,000 for joint filers, so you may not have any capital gains tax liability if you sell your primary residence for a profit before you move. If you realize profits greater than those exclusion amounts on the sale of your primary residence, though, you’ll generate a taxable event that must be dealt with in the same tax year that the gain was realized.
The majority of states levy capital gains taxes – the only ones that don’t are Alaska, Florida, New Hampshire, Nevada, Texas, South Dakota, Wyoming, and Washington. You may face additional capital gains tax consequences in these other states if you sell an investment or asset for a profit prior to moving.
Moving to avoid state capital gains taxes may not work in your favor, either – especially if you move from a state with notoriously high taxes, such as Illinois, New York, or California, to a state with a relatively low tax burden. Such a move may generate a residency audit, especially if you still have business ties to your old state or you divested investment assets for significant profit just prior to your move.
Consider the great California exodus. More than 352,000 residents of the Golden State moved elsewhere from April of 2020 to January of 2022, the state’s Department of Finance reports.1 While some states offer preferential treatment on capital gains, California does not. Capital gains realized in California are taxed as ordinary income regardless of how long the asset was held. So moving to another state to avoid this tax after selling a large amount of stock or receiving a significant trust distribution may result in a residency audit and a capital gains tax liability.
Putting it all Together
If you are moving but have significant assets that are tied to one state, such as investment real estate, consider discussing your situation with a tax professional so you might better understand your potential capital gains tax exposure. You may be able to come up with a strategy to divest or continue holding key assets depending on the capital gains taxes you might generate before you move.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
