Manes Law

Study of Total Tax Burden by State: Some Expected and Not-So-Expected Results A recent study comparing the states by income tax, sales tax, property tax, average overall tax burden and average effective income tax rates, including dollar for dollar and by percentage, ...

Where Is Bitcoin? Cryptocurrency and California’s Income Sourcing Rules Where is Bitcoin? This may sound like a question on a Philosophy 101 midterm exam. But in fact, it’s a real-world tax issue, with huge potential tax consequences for nonresident traders, ...

Do You Need California Residency Tax Planning? Not Everybody Does, But Those Who Do, Really Do Nobody needs reminding that California is a high income tax state. Most people know there can be tax benefits from changing residency or maintaining nonresidency status where California is ...

Stranded in California: Coronavirus Lockdown and Nonresident Status Can COVID-19 Orders Make You A Resident? Since the COVID-19 emergency struck, tens of thousands of nonresidents have found themselves marooned in California due to coronavirus travel ...

https://www.palmspringstaxandtrustlawyers.com/five-more-internet-myths-about-california-residency-rules/?fbclid=IwAR04EKMPJ-Wq-rANCT8xGfvsFNGKJ3sL2nFgZd-hnfBEFXacXRfeeWmqEoo

Five (More) Internet Myths About California Residency Rules I discussed my top five internet myths about California tax residency rules in a previous article. Here are five more. Again, they’re in no particular order, but my comments should provide some ...

https://www.palmspringstaxandtrustlawyers.com/five-internet-myths-about-california-residency-rules-and-how-they-can-cost-you/

Five Internet Myths About California Residency Rules: And How They Can Cost You While not quite as prevalent as Bigfoot videos, myths about California’s residency tax rules abound on the internet. Of course, believing in Bigfoot won’t increase your chances of a residency ...

https://www.palmspringstaxandtrustlawyers.com/the-part-time-resident-tax-trap/

The Part-Time Resident Tax Trap Most of the world knows the Palm Springs area for its picturesque golf courses, celebrity homes and halcyon weather. Among the taxing authorities in Sacramento, however, the words "Palm Springs" ...

https://www.palmspringstaxandtrustlawyers.com/2018/04/request-for-tax-return-time-for-nonresidents-how-not-to-make-that-mistake-again.html

“REQUEST FOR TAX RETURN” TIME FOR NONRESIDENTS: How Not to Make that Mistake Again With Tax Day having come and gone, the Franchise Tax Board, California’s tax authority, is now busy sending out its annual 4600 Notices, also known as “Request for Tax Return” letters. Almost ...

California ballot initiative proposes estate tax for nonresidents

http://calresidencytaxattorney.com/residency-tax-news/california-ballot-initiative-proposes-estate-tax-on-residents-nonresidents-assets

California Residency Tax News Sanger & Manes blog on developments in California residency tax law

https://www.palmspringstaxandtrustlawyers.com/2018/03/moving-overseas-california-residency-minefield-expats.html

MOVING OVERSEAS FROM CALIFORNIA: A Residency Minefield for Expats The global economy has enabled growing numbers of California residents to find employment overseas, often in Pacific Rim or European countries. Many of these jobs are in financial services or ...

https://www.palmspringstaxandtrustlawyers.com/2018/03/bitcoin-california-residency-planning-ahead-makes-tax-difference.html

Bitcoin and California Residency: Planning Ahead Makes All The Tax Difference The fortunes currently being made in Bitcoin and other cryptocurrency investments and trading offer unique opportunities for tax planning that other appreciated assets often do not. This article ...

Proposed law would tax nonresidents who own California vacation homes
http://www.calresidencytaxattorney.com/residency-tax-news/proposed-law-targets-nonresidents-who-own-california-vacation-homes

California Residency Tax News Sanger & Manes blog on developments in California residency tax law

Essential California Residency Tax Articles, for those considering leaving California, moving their business, working remotely, or owning a vacation home

http://www.calresidencytaxattorney.com/essential-residency-tax-articles

Articles on California Residency Law by Residency Attorney Christopher Manes Articles on California residency, residency audits, businesses moving from California, nonresidents owning vacation homes by residency expert Chris Manes

Congressional Republicans propose changes to federal tax code which may increase income taxes for California residents
http://www.calresidencytaxattorney.com/residency-tax-news/taxcutandjobsact

California Residency Tax Blog Sanger & Manes blog on California residency tax law

FTB proposes new California-source income rules affecting nonresident investors

http://www.calresidencytaxattorney.com/residency-tax-news/new-california-source-income-rules-affecting-nonresident-investors

California Residency Tax Blog Sanger & Manes blog on California residency tax law

https://www.palmspringstaxandtrustlawyers.com/2017/10/canadians-us-estate-taxes-unique-marital-credit-works.html

CANADIANS AND US ESTATE TAXES: How the Unique “Marital Credit” Works One of the major concerns of Canadians holding US real estate or other assets is whether the property will be subject to the US estate tax when they die. It’s no small matter. The estate tax ...

https://www.palmspringstaxandtrustlawyers.com/2017/10/happy-halloween-4600-notice-time.html
Happy Halloween: It's 4600 Notice Time Again!

HAPPY HALLOWEEN: It’s 4600 Notice Time Again California’s Franchise Tax Board (FTB) sends out 4600 Notices “Request for Tax Return” when it gets a tax “information return” with a California address on it, but the taxpayer doesn’t file a ...

With the California real estate market heating up for foreign investors, California's tax authority, the Franchise Tax Board, has issued a new brochure, California Real Estate Withholding - Foreign Sellers, which provides an overview of withholding rules for real estate sales by foreign nationals. This brochure will be particularly useful to Canadian investors, who make up a large percentage of the foreign nationals in California's real estate market. But it also applies to any nonresident selling California real property. A foreign seller of California real property is subject to both federal and state withholding requirements, and unless a full or partial exemption applies, California law requires real estate withholding by the escrow company when a transfer of title on California real property occurs. This often comes as an unpleasant surprise to foreign investors selling California real estate, especially if they are counting on the cash from the sale to fund another investments. Withholding can often be avoided, but it may require planning months in advance of the sale. The brochure provides an overview of information relating to withholding, including obtaining the required taxpayer identification number, withholding exemptions, withholding methods, false exemption certification, and filing instructions. (California FTB Informational Publication No. 4050, , 09/01/2017 .)

http://calresidencytaxattorney.com/residency-tax-news/new-publication-on-withholding-in-california-real-estate-sales-by-nonresidents-foreign-investors

California Residency Tax Blog Sanger & Manes blog on California residency tax law

https://www.palmspringstaxandtrustlawyers.com/2017/09/g-guidelines-for-determining-residency.html

GUIDELINES FOR DETERMINING CALIFORNIA RESIDENCY: A Primer for Serious Snowbirds Let's go over the basics of California residency taxation. They can be brutal. How Residents and Nonresidents Are Taxed California residents are subject to California state income tax on all ...

Website “Locations” Matter: Arizona Internet-Based LLC Ruled “Doing Business” in California

The State Board of Equalization (SBE) sustained the Franchise Tax Board’s (FTB) determination that an Arizona internet-based limited liability company, which elected to be taxed as an S corporation, was doing business in California, and thus subject to California tax. (Appeal of CheeryLynn Interactive, LLC, SBE, Case No. 864551, 10/25/2016, released 10/09/2017).

The company was organized and operated in Arizona and had no physical office or operations in California. The ruling was based substantially on the fact that the LLC’s website listed a California address as one of its locations. In addition, one of its owners subsequently moved to California and performed managerial duties there, for which he was paid in the form of wages, and the company used his address on its federal tax returns.

The case involved the “franchise tax” – that is, the payment required by any entity doing business in California, calculated for S corporations as $800 or 1.5% of the company’s net income, whichever is greater. As it happens, not a large amount was at stake in this case. But it could have been, had the company been a successful out-of-state e-commerce company, especially with arrears and penalties factored in.

The case is designated “not to be cited as precedent,” which means it can’t be used in an official proceeding against a taxpayer (the SBE either publishes a case for precedent or designates it as not citable). Nonetheless, the reasoning in the case is a good indication of the position the FTB will take in future audits and assessments of non-California internet companies. The SBE is giving the FTB a green light to aggressively pursue them for what some might take to be trivial residency information on their websites.

A particularly interesting detail in the case is that the FTB obtained information that the company claimed to have a location in California from an archived capture of the taxpayer’s webpage from 2006, over 10 years ago. The archived capture displayed both an Arizona and a California address. The message is clear for out-of-state businesses: be very careful what you put on your website for residency purposes. It can come back to haunt you a decade later.

Finally, the FTB also received information from the IRS that the company’s tax return used a California address. While federal tax returns are generally privileged, states may inspect them in connection with the official administration of the state tax laws. The lesson here is, if you use a California address on a federal tax return, the FTB can find out about it and use it against you. It is one of the most common errors nonresident individuals and businesses make when it comes to residency and doing business in California planning. Usually the California address is used solely for convenience sake, as it apparently was in the CheeryLynn Interactive case. It can be a costly mistake.

http://www.calresidencytaxattorney.com/residency-tax-news/websites-locations-matter-arizona-internet-based-llc-ruled-doing-business-in-california

California Residency Tax Blog Sanger & Manes blog on California residency tax law

HOW TO TITLE US REAL ESTATE FOR CANADIANS:
A Primer
By Chris Manes

http://www.palmspringstaxandtrustlawyers.com/2017/02/title-us-real-estate-canadians-primer.html

One of the perennial questions my Canadian clients ask me is how they should take title to their US real estate, usually a vacation home. My answer is, it depends on a number of considerations, but the right choice probably involves a revocable trust specially drafted to hold US real estate. But in any case, some thought has to go into the decision. Thousands of dollars may be at stake if the wrong method of title is used. The choice shouldn’t be made casually while signing escrow papers, which regrettably often happens.

The best way for Canadians, and foreign nationals in general, to hold US real estate depends on their plans for the property, its value, the owner’s age and net worth, whether the property has appreciated since it was purchased, the expectation of rental income, and what issues loom large for the owner (avoiding probate, escaping the US estate tax, selling the property with a minimum of capital gain, limiting personal liability). Let me go over the basics.

1. The Probate Issue. A probate in Canada can’t transfer real property located in the US to the decedent’s heirs. Neither a California court nor the local county recorder will recognize foreign court orders when it comes to US real estate. So, if you are a Canadian and you own a vacation home in California in your individual name (or both the names of you and your spouse), when one of you dies you will have to probate the real property (the exception is property held in joint tenancy, discussed below). Another probate will be required when the surviving spouse dies if the spouse hasn’t sold the property. Probate is the process whereby a court oversees and orders the transfer of assets from a decedent to the decedent’s heirs. Like any court process it tends to be time consuming, public, and involves significant attorney’s fees. Most foreign nationals are wise to try to avoid it.

2. US Real Estate Trust. Typically my non-citizen clients are best served by a “US real estate trust.” Simply put, this is a revocable trust that holds only US real property for a foreign national. Upon the death of one of the spouses, the property usually goes to the survivor, and after the survivor dies, to their children, or anybody else named as beneficiaries – all without a probate proceeding. This can save thousands to tens of thousands of dollars depending on the value of the property (probate attorneys are paid a percentage of the value of the probated property). The US doesn’t treat a revocable trust as a tax entity, so there are no US tax consequences to this type of trust. In contrast, however, foreign tax systems often treat revocable trusts as taxable entities. In fact, Canada does just that. Transferring appreciated real property into a trust can result Titling-US-real-estate-copy-300x150in Canada assessing a tax. So some analysis has to go into determining whether a US real estate trust makes sense in a particular case. A US real estate trust is usually for foreign nationals who own a vacation home in the US, and plan to hold onto the property at least until one of the spouses dies. Assuming your worldwide net worth is less than $5.5 million (or $11 million for you and your spouse), upon your death, the US estate tax is handled rather simply by your home country executor filing a US tax form for “invoking the US-Canadian tax treaty.” The result should be zero US estate tax. In addition, in this estate plan, the surviving spouse gets the basis in the property “stepped up” to date-of-death value. This may be important if the surviving spouse ultimately sells the property, since it should reduce the taxable gain. This benefit contrasts with joint tenancy, discussed below.

3. The Cross-Border Trust. If your net worth is nearing $5.5 million, you may want a more complex “cross-border” trust to avoid US estate taxes. This is a consideration for foreign nationals who want to avoid the high rate of US estate taxes. Setting up a cross-border trust is complex, expensive, results in some loss of control of the asset, and requires significant input from home country tax counsel. There is talk in the US Congress of repealing the estate tax completely, so many of my Canadian clients who would typically establish a cross-border trust, are taking a wait and see approach.
Joint Tenancy. If you plan to sell the real property in the not-too-distant future, and you’re relatively young, then you might be best served by holding the property in joint tenancy. Joint tenancy avoids probate upon the death of the first spouse to die. To transfer the property to the surviving joint tenant requires only the recording of some relatively simple paperwork. Many brokers advise joint tenancy for Canadians as the default method for taking title. But there are downsides. A probate will be necessary when the surviving spouse dies unless they put the property in a trust or otherwise dispose of it. More important, you potentially lose some income tax benefits upon sale. Namely, when the first spouse dies only half the basis is stepped up to date-of-death value. That means, if the surviving spouse sells the property, there will potentially be a higher capital gains tax on the sale. Note this is not the case if the property is held in community property with right of survivorship, where the surviving spouse avoids probate and gets a full stepped-up basis. But this method of title comes with all the burdens of community ownership.

4. Revocable Transfer on Death Deed. California recently established a simplified system for transferring real property called a revocable transfer on death deed. Basically, it allows the owner of real property to name beneficiaries in the deed itself, who will take ownership of the property upon his death, without the need of a probate. It is similar to a death beneficiary designation in an IRA or other financial account. The advantage is that it’s inexpensive and can be revoked at any time by the owner. The downsides are it’s public, if the beneficiary dies before the owner a probate may be required, and changing the beneficiary requires recording a new deed (rather than the simple trust method of preparing and signing an amendment). Perhaps the biggest drawback is that the transfer on death deed is totally new, so there is uncertainty about what legal disputes it will raise, especially if the property is currently held by more than one owner.

5. Entity Option. Finally, for Canadians who plan to rent their US property for annual amounts expected to be significant, they may want to consider a business entity to hold the property. Entity ownership provides various benefits, from liability protection to probate avoidance. Unfortunately there can be limitations on the type of entities foreign nationals can use due to a mismatch in some of the provisions of the tax treaties. That’s the case with Canada, which doesn’t recognize limited liability companies, the vehicle that would typically be used in the US to hold rental property. Using a limited liability, therefore, could result in double taxation. In addition, the inheritance of the business interest also often subjects non-nationals to different tax treatment. Accordingly, significant planning has to go into this option.

To summarize: choosing the method for holding title to US real estate is not something Canadians and other foreign nationals should do hastily while signing escrow papers. It requires genuine tax planning.

HOW TO TITLE US REAL ESTATE FOR CANADIANS: A Primer One of the perennial questions my Canadian clients ask me is how they should take title to their US real estate, usually a vacation home. My answer is, it depends on a number of considerations, ...

http://www.palmspringstaxandtrustlawyers.com/2017/02/working-vacationing-perils-california-source-rules-nonresidents.html

WORKING WHILE VACATIONING:
The Perils of California Source Rules for Nonresidents
By Chris Manes

In “Nonresidents Working Remotely for California Businesses” I discussed how the internet economy, ecommerce and constant connectivity has allowed increasing numbers of nonresidents to provide services to California businesses without setting foot here. As long as those nonresidents meticulously follow the rules, they can work remotely free from California income taxes. Or at least they can minimize the amount they do have to pay.

But the remote economy is a two-way street. The technology that lets a Colorado resident work for a Los Angeles firm from his offices in Boulder, also allows him to run his Colorado business while vacationing at a Southern California beach house. More and more nonresident business owners are doing just that. And that can lead to California tax problems.

This isn’t a theoretical issue. The idea of taking a vacation of any significant length without doing any work is obsolescent. Research shows over 50% of employees work while on vacation, and as to business owners, the figure is around 85%. Moreover, since business owners can increasingly operate their business from anywhere, including a California vacation home, the lines between an extended vacation and running a business remotely are becoming blurred. Whether this is a good or bad development, it can result in unexpected and unpleasant tax consequences.

Just to review, California generally taxes all the income of residents, from whatever source. California taxes nonresidents only to the extent that their income is “California source.”

Many forms of income are easy to categorize as California source — rents from or sales of California real estate, income from operating a California business, wages for work performed in-state. When LeBron James plays the Clippers at Staples Center, he’s plying his trade in California and therefore pays California income taxes on the wages earned that night on the court.

But others are more difficult to source. Running an out-of-state business while on vacation in California falls into a gray area.

There is no case law or regulations on “working vacations” or “vacationing work.” The law was created before the internet, ecommerce and the connected economy. People used to go on vacation and do little else but enjoy themselves, except perhaps the occasional phone call to the office. The case law assumes when a person is on vacation in California, they aren’t working, by definition. But this notion is archaic. Most nonresident business owners can run their business while on vacation and in fact often can’t avoid doing so. If we are talking about a four-month vacation stay, the income tax risk can add up.

California residency regulations treat work carried on in-state as California source. It doesn’t matter if the work is performed for a non-California business. So it’s fair to say that if the FTB audited a nonresident and found he was working remotely for an out-of-state enterprise while on vacation, the FTB would assess a tax.

There is a limited exception that might save the workaholic vacationer: if a nonresident’s gross income is below a certain threshold, there is no reporting requirement for California source income. But the threshold is so low (basically 16,000 for a single person, and $35,000 for married couples), that it doesn’t apply to most business people who have the luxury of vacationing in the Golden State for any length of time.

There are ways around this problem, but they take careful planning and can have significant downsides. California can’t tax a nonresident’s work in California if it isn’t compensated. Most business owners or top management control their compensation packages. If the agreement is, the nonresident can vacation in California all he wants, but any work there will not be compensated, then there is no income for California to tax. Of course, this results in a different problem — it’s always better to make more money and pay taxes on in, even at California’s high rates, than to make less money. But if the company can make up for that with a larger share of profits (not taxable by California because there is no business situs here), some other nontaxable fringe benefits, or higher pay for on-site work, then it may be worth it to reduce the risk of an unfavorable audit.

But this may in turn raise other issues. Specifically, the IRS won’t allow business owners to claim their compensation is pure profit; rather it deems a reasonable portion of their compensation as payment for work (and subject to higher rates, F**A, etc.), assuming they aren’t passive investors. So, any plan to limit taxable California income for remote work must take into consideration federal rules.

To summarize: working remotely for an out-of-state business while vacationing in California has become the norm for many nonresident business owners, especially if ecommerce is involved. But it comes with risk. If you are audited, the compensation related to that work may be taxable by California as California source. At the entity level, there may be work-arounds, and this may be important if the vacation is an extended stay, potentially exposing large amounts of income to California source taxation. But any such arrangement requires significant tax planning at both the state and federal level.

Or you could just take an old-fashioned vacation, and not do any work.

CANADIAN SNOWBIRD OR LANDLORD OR BOTH? The Tax Differences - Palm Springs Tax and Trust Lawyers Helped along by the depressed US housing market in the past few years, the Palm Springs, California, area has become a hot spot for Canadians to purchase vacation homes or rental property. Often the same property is used for both... Published By Sanger & Manes, LLP

Canadians and Palm Springs Real Estate For Canadians who love, live in , and visit the Palm Springs area , to share their thoughts, experie