Could a taxpayer who moved out of California use capital losses from securities sold while she was a California resident against gain from a later sale of her California home?

Plain-English summary

California Chief Counsel Ruling 2005-0008 allowed a taxpayer to use a capital loss carryforward from securities sold while she was a California resident against gain from selling her California residence after moving to another state.

Both sides of the offset were sourced to California. The securities losses followed the taxpayer's California domicile on the dates she sold the intangible property. The home-sale gain followed the location of the California real property.

The taxpayer's later change of residence did not alter the source of the already-realized securities losses.

The taxpayer's situation

The taxpayer was a long-time California resident and domiciliary. She inherited securities and her principal residence from her husband, taking a date-of-death fair-market-value basis as described in the ruling.

Some securities later declined substantially in value. She sold them while still domiciled in California and generated a large capital loss carryforward.

Her California residence appreciated. She considered selling it and establishing residence in another state, but did not yet know whether the home sale would occur in the same tax year as the residency change or the following year.

Some assets were held through a grantor trust of which she was sole beneficiary and held a power of appointment. The trust's income and expenses flowed to her individual returns, so FTB issued the advice to her as an individual.

Section 17041(i)(3)

Section 17041(i)(3) limited carryovers, deferred income, suspended losses, and suspended deductions for a nonresident or part-year resident to the portion derived from California sources.

The ruling explained that a residency change requires those items to be restated based on the taxpayer's current residency status. A resident is taxed without regard to source, while a nonresident must identify the source of both income and carryover items.

Why the stock losses were California-source

Under the doctrine cited in the ruling, intangible property had a taxable situs at its owner's domicile.

The taxpayer was domiciled in California when she sold the securities and realized the losses. Her later move did not change that historical fact.

After the sales, she no longer owned the securities, so a later domicile could not relocate those already-realized losses.

Why the home gain was California-source

The gain followed the location of the real property.

Because the residence was in California, gain from its sale was California-source income whether the taxpayer sold it before or after becoming a nonresident.

Holding

FTB held that the taxpayer could apply her capital loss carryforward against the gain from selling the California residence because both items were sourced to California.

The ruling did not turn on whether the home sale occurred in the same tax year as the move or in the immediately following year.

What this means for you

Individuals moving out of California

Changing residency does not automatically erase a carryforward, but California requires source matching for nonresidents and part-year residents. Trace where and when the underlying loss arose.

Homeowners

Moving before selling does not change the California source of gain from California real property.

Tax preparers

Retain brokerage confirmations, acquisition and sale dates, domicile evidence for the loss year, carryforward schedules, property records, closing documents, residency-change evidence, and any grantor-trust reporting.

Common questions

Q: Did moving out of California change the source of the stock losses?

A: No. The taxpayer was California-domiciled when she sold the securities, and the later move did not alter that source.

Q: Why was the home-sale gain California-source after the move?

A: It arose from California real property, so its source followed the property's location.

Q: Could the loss carryforward offset the home-sale gain?

A: Yes. Section 17041(i)(3) permitted the offset because both were California-source items.

Q: Did it matter whether the home was sold in the move year or the next year?

A: The ruling allowed the offset without making its holding depend on which of those two years contained the sale.

Q: Did the grantor trust prevent the individual from using the losses?

A: No. On the stated facts, the trust's income and expenses flowed directly to the taxpayer's individual returns.

Citations and references

• Cal. Rev. & Tax. Code § 17041(i)(3)
• Mobilia sequuntur personam sourcing doctrine, as applied in the ruling

Source

• Landing page: Chief Counsel Ruling index
• Official ruling: Chief Counsel Ruling 2005-0008

Original ruling text

STATE OF CALIFORNIA
STEVE WESTLY
FRANCHISE TAX BOARD
Chair
PO Box 1720
Rancho Cordova, CA 95741-1720
JOHN CHIANG
Telephone (916) 845-3796
Member
FAX (916) 843-6082
TOM CAMPBELL
Member

September 20, 2005
**** Chief Counsel Ruling 2005-0008

Dear **:

This Chief Counsel Ruling is issued in response to your request for advice dated **, concerning the application of Revenue and Taxation Code 17041(i)(3) with respect to
** capital loss carryforwards from the sale of stock and her gain on the sale of her California residence upon her establishing residency in a state other than California. You requested written confirmation of oral advice previously provided by Franchise Tax Board staff.

FACTS

Taxpayer, **, is a long-time resident and domiciliary of California. Within the estate inherited by Taxpayer from her husband in were a substantial number of security positions, as well as her principal residence. 1 In accordance with California law, Taxpayer took each item of inherited property with a tax basis equal to the fair market value of that item on the date of death of her late husband. A portion of the security positions lost substantial value over the succeeding years and in *****, Taxpayer disposed of such security positions, realizing substantial capital losses that resulted in a substantial capital loss carryover that remains to this date. In contrast, over the period since the death of her husband, the value of Taxpayer's California residence has appreciated substantially. As a result, were Taxpayer to sell the California residence, she would realize a substantial capital gain on the sale.

Taxpayer is currently considering selling her California residence and establishing residence in a state other than California. It is uncertain at this time whether the sale of

1
It is noted that Taxpayer is not the direct owner of some of the security positions and is not the titleholder of the California residence. These properties are held in the ****** (the "Trust"). The Trust is treated as a grantor trust for tax purposes because the Taxpayer has power of appointment over the assets of the Trust. Taxpayer is the sole beneficiary of the Trust. As a result, the income and expenses incurred by the Trust flow directly to Taxpayer's individual income tax returns. This advice is given with respect to Taxpayer as an individual.

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her California residence will occur in the same tax year as the change of residency or in the year immediately subsequent to the change of residency. Taxpayer seeks guidance on whether her anticipated change of residency would limit her ability to apply her capital loss carryover against the substantial capital gain she expects to realize on the sale of her California residence.

ISSUE

Whether Taxpayer, upon selling her California residence and establishing residence in a state other than California, may apply her capital loss carryforward against the gain realized upon the sale of her California residence.

HOLDING

Yes. Taxpayer may apply her capital loss carryforward against the gain realized upon the sale of her residence because both items would be sourced to California.

DISCUSSION

Revenue and Taxation Code section 17041 subsection (i) paragraph (3) provides as follows:

For purposes of computing "taxable income of a nonresident or part-year resident" under paragraph (1), any carryover items, deferred income, suspended losses, or suspended deductions shall only be includable or allowable to the extent that the carryover item, deferred income, suspended loss, or suspended deduction was derived from sources within this state, calculated as if the nonresident or part- year resident, for the portion of the year he or she was a nonresident, had been a nonresident for all prior years.

The amendments to section 17041 in 2002, and subsequently, did not alter California's sourcing rules. Instead, they were meant to clarify how carryover items should be applied when a taxpayer changes her residency. Because residents are taxed on all income regardless of source, source is not considered when carryover and other deferred items are being applied. Nonresidents, on the other hand, are taxed only on sourced income so the source of each carryover and other deferred item becomes important. Upon changes in residency, carryover and other deferred items must be restated to reflect the taxpayer's current residency status.

The gain on the sale of Taxpayer's residence in California is clearly sourced to California. The source of that income is the location of the property sold. Since it is real property it is simple to ascertain the location of the property. To offset her capital gain, Taxpayer would like to be able to use any applicable capital losses that she has carried forward.

As a nonresident, Taxpayer may only apply loss carryovers to offset the gain from California sources if such loss carryovers are sourced to California. Were the losses from

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the sale of securities sourced to California? Under the doctrine of mobilia sequuntur personam, intangible property has a taxable situs at the domicile of the owner. On the dates of the sales of the securities, California was the domicile of the owner (Taxpayer). The fact that she subsequently moved from California does not alter that fact. Furthermore, after the sale, Taxpayer was no longer the "owner" of the securities so her domicile would no longer be relevant.

Please be advised that the tax consequences expressed in this Chief Counsel Ruling are applicable only to the named taxpayer and are based upon and limited to the facts you have submitted. In the event of a change in relevant legislation, or judicial or administrative case law, a change in federal interpretation of federal law in cases where our opinion is based upon such an interpretation, or a change in the material facts or circumstances relating to your request upon which this opinion is based, this opinion may no longer be applicable. It is your responsibility to be aware of these changes, should they occur.

This letter is a legal ruling by the Franchise Tax Board's Chief Counsel within the meaning of paragraph (1) of subdivision (a) of section 21012 of the Revenue and Taxation Code. Please attach a copy of this letter and your request to the appropriate return(s) (if any) when filed or in response to any notices or inquiries which might be issued.

Very truly yours,

Natasha Sherwood Page
Tax Counsel III