What Happens When You Leave California
If you are considering moving from California to Nevada, Texas, Florida, or another lower-tax state, you may be asking: Does California have an exit tax? As of September 2026, the answer is no. California does not currently impose a separate tax merely because you move out of the state.
That does not mean California necessarily stops taxing you when the moving truck leaves.
The California Franchise Tax Board can continue taxing California-source income after you become a nonresident, and it can challenge whether you genuinely changed residency in the first place. Moreover, California voters will consider a significant new wealth-tax proposal, Proposition 40, on November 3, 2026. If approved and ultimately effective, it would impose a one-time 5% tax on the covered wealth of billionaires who were California residents on January 1, 2026.
For high-income and high-net-worth taxpayers contemplating the sale of a business, exercise of valuable stock options, realization of substantial investment gains, or another major liquidity event around a move, California residency and sourcing planning should occur before the transaction and preferably before the move.
What Taxes Can California State Still Impose After You Leave?
California residents generally pay California income tax on income from all sources. Once someone genuinely becomes a nonresident, California generally taxes that individual only on income sourced to California. A part-year resident generally remains taxable on worldwide income received while a resident and California-source income received while a nonresident.
That is why saying “California has no exit tax” tells only part of the story.
A former California resident can still owe California tax on rental income or gain from California real estate, compensation attributable to services performed in California, and income from business activities sourced to California. Equity compensation can present particularly difficult sourcing questions when an employee performs services in California, subsequently moves away, and exercises or receives the economic benefit from that compensation after becoming a nonresident.
By contrast, income from intangible personal property such as ordinary stocks, bonds, interest, and dividends generally follows the residence of a genuine nonresident unless the intangible has acquired a California business situs. For a taxpayer contemplating the sale of a highly appreciated investment, the distinction between establishing nonresidency before rather than after the taxable event can therefore have enormous consequences.
How Does the FTB Decide Whether You Really Left California?
This is often the real fight.
California treats an individual as a resident if the person is present in California for other than a temporary or transitory purpose or is domiciled in California while outside the state for a temporary or transitory purpose. The FTB’s analysis focuses heavily on where the taxpayer maintains their closest connections.
No single act establishes California nonresidency. Obtaining a Nevada driver’s license will not necessarily accomplish much if your spouse and children remain in California, your principal home remains available to you here, you continue operating your business from California, and most of your personal and professional life remains centered here.
The FTB considers factors including the amount of time spent inside and outside California; location of a spouse and children; principal residence; driver’s license and vehicle registrations; voter registration; professional licenses; banks; doctors, accountants, and attorneys; social connections; real property and investments; and permanence of employment arrangements. The strength of the connections matters more than simply counting them, and no single factor necessarily controls.
High-net-worth taxpayers should therefore establish and document the factual reality of a genuine relocation contemporaneously. Trying to reconstruct a change of residency only after receiving an FTB residency audit notice is a substantially weaker position.
Is California Proposition 40 an Exit Tax?
Not technically. Proposition 40 is more accurately described as a proposed one-time wealth tax, although its treatment of people who leave California creates an obvious exit-tax concern.
Proposition 40 will appear on California’s November 3, 2026 ballot. It would impose a one-time tax equal to 5% of covered wealth on billionaires who were California residents on January 1, 2026. The tax would generally be due in 2027. Taxpayers could elect to spread payments over five years at additional cost. Real estate, pensions, and retirement accounts generally would be excluded from the wealth calculation.
The January 1 residency date matters. If Proposition 40 takes effect, a billionaire who was a California resident on January 1, 2026 could not necessarily escape the tax simply by moving to Nevada or another state later in 2026. In that sense, the measure can operate like an exit-resistant tax even though it does not impose a tax because the taxpayer departed.
There is also an unusual ballot complication. Propositions 41 and 42 potentially conflict with Proposition 40. Proposition 41 would restrict new state taxes that exclude their revenues from California’s voter-approved spending limit and impose audit requirements for programs funded by new special taxes. Proposition 42 would prohibit new state taxes on ownership of financial assets and other personal property and restrict certain retroactive taxes. The Legislative Analyst states that if either Proposition 41 or Proposition 42 receives more “yes” votes than Proposition 40, Proposition 40 could be prevented from becoming law even if it receives majority approval, depending on how courts resolve the conflict.
Therefore, as of September 1, 2026, California still has no enacted wealth-based exit tax. Proposition 40 remains a proposal awaiting the voters.
Why Do People Call California Wealth-Tax Proposals an “Exit Tax”?
Because California lawmakers have previously proposed wealth taxes designed to continue reaching certain former residents after they left the state.
AB 2088, introduced in 2020, would have imposed an annual 0.4% wealth tax on worldwide net worth exceeding $30 million for most taxpayers and included rules that could continue to attribute a declining portion of wealth to California after departure. The bill never became law. The FTB confirms that AB 2088 failed to advance by the legislative deadline.
AB 259, introduced in 2023, proposed even higher rates. For 2024 and 2025, it proposed a 1.5% tax on worldwide net worth above $1 billion for most taxpayers. Beginning in 2026, it would have imposed 1% above $50 million plus an additional 0.5% on wealth above $1 billion. Its proposed residency rules also contemplated continued taxation based on prior California residency. It likewise never became law.
These proposals explain why the phrase “California exit tax” continues to circulate even though California currently imposes no general tax simply for moving away.
Does the Federal Government Have an Exit Tax?
Yes. But moving from California to another state does not trigger it.
Internal Revenue Code section 877A imposes an expatriation tax regime on certain U.S. citizens who relinquish citizenship and certain long-term lawful permanent residents who terminate their U.S. residency. A long-term resident generally means someone who held lawful permanent resident status during at least eight of the fifteen taxable years ending with the year of expatriation, subject to additional rules.
For expatriations occurring in 2026, an individual can generally become a covered expatriate if any of three tests applies: the individual’s average annual net federal income tax liability for the preceding five years exceeds $211,000; net worth equals or exceeds $2 million on the expatriation date; or the individual cannot certify compliance with federal tax obligations for the preceding five years on Form 8854, subject to limited exceptions.
Section 877A’s principal mark-to-market rule generally treats a covered expatriate’s property as sold for fair market value immediately before expatriation. For 2026, the resulting net gain receives a $910,000 exclusion, while separate rules apply to certain deferred compensation, specified tax-deferred accounts, and interests in nongrantor trusts.
That is a genuine federal exit tax.
Moving from Los Angeles to Las Vegas is not expatriation and does not trigger section 877A.
Tax Planning Before Moving Out of California State
For most taxpayers, asking whether California has an “exit tax” focuses on the wrong problem. The more important questions are when California residency actually ends, which income remains California-sourced after the move, and when major taxable events occur relative to the residency change.
Those questions are particularly consequential for business owners preparing to sell a company, founders holding highly appreciated stock, executives with stock options or deferred compensation, partners and LLC members receiving California business income, owners of California real estate, and high-net-worth families contemplating a move to a lower-tax state.
A legitimate disagreement over residency or sourcing generally remains a civil tax controversy. The situation becomes far more dangerous if a taxpayer fabricates residency documents, falsifies travel records, conceals substantial California connections, or knowingly files a false California nonresident return. What should have been an FTB residency audit can then create civil tax fraud exposure and, in sufficiently egregious circumstances, potential criminal tax exposure.
At the Tax Law Offices of David W. Klasing, our dual-licensed Tax Attorneys and CPAs analyze California residency, income sourcing, transaction timing, federal tax consequences, and potential FTB audit exposure together. We focus not simply on preparing a technically correct return but on developing a tax position capable of surviving scrutiny if the federal or California taxing authorities later challenge it.
If you are considering leaving California, particularly before selling a business, exercising valuable equity compensation, realizing substantial investment gains, or completing another major transaction, the best time to establish a defensible tax position is before you move and before the taxable event occurs.
Call the Tax Law Offices of David W. Klasing at (800) 681-1295 or contact us online to schedule a reduced rate initial consultation.
