Nonresident Investors in California Rental Property

The potentially adverse tax considerations for individual nonresident owners of California vacation homes (discussed on webpage entitled “Tax-Efficient Structuring of California Vacation Home Ownership”) may be magnified several times for individual nonresident investors in California rental property, whether such property is residential rental, commercial, industrial, ranch or agricultural property. In this regard, even a dollar of California source gross rental income earned by a nonresident individual requires the filing of a California individual nonresident income tax return each year that rent is received (even if no tax is due after allowable deductions are taken into account).

Moreover, a California individual nonresident income tax return requires attachment of a US federal income tax return (if one was filed for that year) and any state income tax return filed in the location where tax residence is claimed, as well as disclosure of a significant amount of residence-related information. The latter-mentioned information includes the number of days of presence in California for the tax year in question, the location of your claimed place of residence and domicile, whether you were previously a California income tax resident and whether you have previously been subjected to a residency audit by the California Franchise Tax Board (“FTB”).

Thus, after several years of renting out California property (and filing California nonresident individual income tax returns), the FTB is likely to have collected a vast amount of sensitive personal financial information about its individual owners covering a number of tax years. All of such information could be helpful to the FTB in deciding whether to subject a claimed California nonresident to a residency tax audit.

To address this problem, we have developed tax-efficient structures for nonresident investment in California rental property that can help nonresident owners of California rental property to avoid a number of disadvantageous tax effects of individual property ownership. Those include: (i) filing nonresident individual income tax returns each year; (ii) making related disclosures of your sensitive personal information to the FTB, including by attaching Federal and residence state income tax returns; and (iii) having California nonresident taxes withheld at the time of sale that may take months or years to recover from the FTB.

Our tax-efficient California nonresident rental property ownership structures also commonly reduce the “effective” tax rate on future gains from sale of the vacation residence for both Federal and California income tax purposes. Additionally, California nonresident investment property ownership structures can also potentially solve other cross-border tax problems experienced by nonresident foreign citizens, including US estate tax exposure, US gift tax exposure on inadvertent or intended gifts of interests in the property and US (“FIRPTA”) withholding tax at the time of sale. They can also avoid having to put the rental property through a lengthy California probate should an individual investor die while on title.

At Lance Cross-Border Law and Tax, we have significant experience both in structuring the initial purchase of California rental property by nonresidents and restructuring ownership of existing nonresident-owned California rental properties to produce a tax-efficient result. (Our “quiet” restructuring plans don’t trigger a requirement to file a tax return, subject you to nonresident withholding taxes or result in a property tax reassessment.) We welcome inquiries concerning your specific tax situation and invite you contact us at (760) 578-5093, via email at Brent@LanceCrossborder.com or by using our online contact form to learn more about our California nonresident rental property purchase or restructuring packages. Why not put us to work preventing or solving tax problems for you today?