The Golden State is facing some strong headwinds. The naysayers argue that remote working and the highest income tax rate in the US have caused a raft of firms including Tesla, Oracle and Palantir to relocate from California, while climate change is causing heatwaves, wildfires, and drought.
Yet according to the law firm Withers’ California team, which regularly helps successful people to move in and out of the state, reports of its troubles have been greatly exaggerated. Even setting aside its natural beauty and famously good weather, the world’s fifth largest economy has a number of significant pull factors. They include a buoyant real estate market, the presence of several prestigious universities, and the state’s dominance of the film and technology industries.
Private client and tax partner Naomita Yadav does not expect to see this change. “Like it or not, Silicon Valley is still very much the startup capital. Whether you want to network or fundraise, the ecosystem is so much further ahead than it is in other places,” she says.
Purchasing a first or second home in San Diego
California’s steadily rising house prices show many people are still willing to pay a premium to have a home in the state. “The combination of a robust economy, jobs and great schools continues to be very attractive, and we also see a lot of people buying property for investment purposes,” says Yin Ho, a partner in Withers’ real estate team.
The firm has acted in the sale and acquisition of some of the state’s most notable properties, from Napa Valley vineyards to villas with adjoining polo fields. Managed properties are also very popular. “At the very top end of the luxury market, people are increasingly looking for property with concierge service attached, especially if they are likely to be away for months at a time,” adds real estate partner Loretta Thompson.
Buyers who are acquiring second homes in the state, or purchasing property for their children to live in while studying, will often consult Withers to ensure they are paying a fair market rate and can easily resell if required. Often they may not have considered issues such as insurance, which is currently more difficult to find after a series of wildfires in rural areas caused some insurers to pull out of the market. “Traditionally buyers would put off the insurance portion towards the end of the process. Now there is a complete role reversal, where we are advising people to talk to an insurance broker at the outset to see what coverage is available,” says Yin.
Privacy is another major concern, particularly for business leaders and celebrity clients. To avoid these individuals being “doxed” – having personal information such as their address or the value of their home being published on the internet – the firm offers strategies such as buying homes through multi-layered entities to keep their names private.
Tax and residency considerations
Clients may also require help navigating California’s tax rules, especially those around second homes. “California residence is very sticky,” comments Naomita. “A lot of times clients come to me saying, somebody gave me a checklist to follow so that I won’t be considered a resident. I always say to them, that is not the law.”
The state will consider whether a person’s presence is “temporary and transitory”. “What I ask people is, is this truly your second home or is it just a vacation house? If you own a two-bedroom apartment in Kentucky and a mansion in Beverly Hills, you are going to have a hard time arguing that your main residence is outside California.”
“A lot of times I’m able to structure trust entities for people so that they can move assets out of the state, as long as they have the correct type of assets,” adds Naomita. Whether this is possible depends on the source of the income. For example, while an actor or producer might argue that they have made a film abroad, the income can be considered to have been generated in Hollywood if the studio is located in Hollywood. Should that person have another income stream such as an investment portfolio, however, it is possible to transfer this into a trust outside the state.
Estate planning is particularly important, since California has its own probate process that may be challenging for a foreign executor. “I would advise anyone thinking of buying a second home to get advice from the start so that things can be simplified and taxes can be coordinated with their own country,” says San Diego cross border estate planning partner Michelle Graham says.
Whether for tax or personal reasons, there will always be people who decide that California is not for them. “We do see people leave, but we also see them come back. When you ask why, they say ‘Life is short. We’ll pay the taxes’,” says Michelle.
Learn more about Withers on their website
