Reciprocal Tax Agreement between AZ - Cal. (pay, million, taxes)

[john3232]

Here`s the agreement:
Knowledge Base Solution - How is the reciprocal agreement handled for Arizona using worksheet view in Individual tax?



My wife and I and planning to move to Az next year where we will establish residence.

We are also planning to sell a Cal. rental home in 2019 and of course will be required to pay Cal taxes..

However, I noticed (see the above link) if we were to establish residence in AZ next year and sell the Cal property too AZ will mot give me credit for the Cal taxes paid.

Or am I reading this wrong?

I would like to move to AZ next Feb. But if necessarily I can continue living/working abroad until after the sale of the Cal property in 2019 and establish AZ residence in Jan. 2020.

My wife and I are both eager to return to the States but will put off the move for another year if this means I can avoid AZ taxes.

Cal. is going to sock me with huge tax bill give the capital gains on the property will be around 1.5 million.

I would like to avoid AZ getting a slice of the profits too.


I will be speaking with a CPA next month but any clarification beforehand would be helpful.

Thanks

John

[john3232]

I think I've found the answer:

You would need to pay state tax based on the location of the rental property, in this case CA. This is based on source income rules. Your other income like investments and pension, if applicable, would be taxed by AZ if you qualify for state residency next year.

If the above is correct than it appears I won't have to pay any state/local tax in AZ with regards to the sale of my rental property in Cal.

[SuiteLiving]

I'm pretty sure the reciprocity agreement between AZ and CA relates only to wages, although the link you provided is not clear on this point. Every reciprocity agreement I've ever looked at was limited to wages. Take a look at this link which is a little more specific.

https://tax.thomsonreuters.com/blog/...ty-agreements/

I would expect you to pay tax to CA on the property sales and then take a credit for the CA taxes on your AZ return.

[john3232]

Originally Posted by SuiteLiving

I'm pretty sure the reciprocity agreement between AZ and CA relates only to wages, although the link you provided is not clear on this point. Every reciprocity agreement I've ever looked at was limited to wages. Take a look at this link which is a little more specific.

https://tax.thomsonreuters.com/blog/...ty-agreements/

I would expect you to pay tax to CA on the property sales and then take a credit for the CA taxes on your AZ return.

Thanks. Yes, it appears the reciprocity agreement concerns wages only.

And given the tax rate in Cal is much higher than AZ I assume the tax credit I receive from Cal. will prevent AZ from taking a slice of the profits as well.

[rjm1cc]

Don't know your states but where I lived the agreements were designed so that you paid an income tax to the state you lived in and did not have to file a return or pay income tax to the state you worked in.

For real-estate the taxes are due to the state the property is in.

Since you want to move and a lot of money is at state I would discuss with a CPA after you finish your research.

My guess is the answer is you can move now and will have resident/non resident tax returns for both states in the year you move and after that a CA tax on the sale of the property. The AZ could be a problem. I know some states tax your total income to figure your local state tax (gets you to higher % for tax) then back out the other states income but the result is you still pay a higher tax than if they excluded.


Maybe you can transfer the property to another entity? If the CA home went into an LLC (corporation) and you sold the stock in the corporation would that work? Could complicate your ability to sell the property.