Relocate to a Higher Taxation State
If you're relocating to a state with higher taxes, consider selling/realizing gains on appreciated assets before you move.
Strategy Overview
If you currently live in a low or no-income tax state like Florida or Texas, but are planning to move to a high-income tax state like California or New York, you may want to consider divesting some of your appreciated assets beforehand. By selling stock while still living in the low/no tax state, your realized gains can be subject to your current state's low/no taxation.
Tax Details
Several states like Texas, Florida, and others do not impose any state income tax on capital gains. Meanwhile, high-tax states like California and New York can tax capital gains at rates up to 13.3%. For stock, the state income tax treatment is based on your state of residence when shares are sold. If planning to move from a no- or low-income tax state to a high-tax state, realizing gains before relocating can avoid high future state taxes.
By selling, you will trigger capital gains tax (something typically desired to be avoided). But if you anticipate selling the shares in the next couple years regardless, selling while you live in the low/no tax state may still be the optimal choice (all else equal). Especially if the taxation difference is large --> such as moving from a no-income tax state (e.g. Texas or Florida) to a high-tax state (e.g. California, New York).
If you would still like to own some of the stock, you can sell and realize the gains, and then immediately rebuy some/all of the shares. This allows you to (1) realize the gains + pay taxes in your existing low/no income tax state, (2) continue to own the shares, and (3) "reset" the tax basis to the current stock price (e.g. you wont have any gains on the position when you relocate to the new/high income tax state).
Key Benefits
Avoid high future state taxes. By realizing gains before moving, the gains you have will not be taxed in your new/high income tax state. Rather, they will be taxed (if applicable) in your current low- or no-income tax state.
Ideal for nearer term sales. Best if planning to liquidate the stock in the next 0-3 years.
Key Considerations/Flags
Requires paying taxes now. This strategy requires you sell and recognize capital gains, which you will owe taxes on.
The benefits are less certain if you plan to hold for many years. If you believe you may hold the stock position for 5+ years, the benefit of selling now to capture your current state's low/no tax rate may not be justified vs. the cash required to pay the tax bill today (vs. continuing to defer the tax into the future).
Make sure to consider long-term capital gains and QSBS. Selling prior to achieving long-term capital gains or QSBS eligibility will rarely make sense.
Strategy: When to Consider This and When to Avoid It
🟢 When to Consider This Strategy:
You plan to move from a no income tax state to a high tax state (e.g. California or New York).
You intend to sell some/all of your appreciated stock holdings in the next 0-3 years.
The state tax savings are worth realizing gains now versus later.
🔴 When to Not Use This Strategy:
You have no plans to sell the stock in at least the next 5+ years.
You are moving to a state with similar tax rates (e.g. from one high tax state to another; or from one no-tax state to another).
Example
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