“Will San Francisco survive?” asked the Salt Lake Tribune. It was 1906 and the city had been largely destroyed by a major earthquake and subsequent fire. Over a century later, plenty of people are asking the same question about the city, and indeed the wider state of California.
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; while climate change is causing heatwaves, wildfires, and drought.
Yet according to California-based lawyers at Withers, which regularly helps successful people to move in and out of the state, reports of its death 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.
Naomita Yadav, who works with many leaders in the fields of technology and entertainment as a private client and tax lawyer, does not expect to see this change. “Like it or not, Silicon Valley is still very much the startup capital, in the same way New York or London are financial capitals. Whether you want to network or fundraise, the ecosystem is so much further ahead than it is in other places,” she says. “The same goes for Hollywood – unless you’re already very established, it’s very difficult to just up and move.”
Purchasing a first or second home in California
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. “California is somewhere people want to come on vacation and they know property will appreciate higher and faster than in other places.”
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. It also advised a couple who bought a house with beautiful views of the Bay Area and a world-class art collection included as part of the deal.
However, the most sought-after properties are those that require the least maintenance, says real estate partner Loretta Thompson. “Many clients don’t have any appetite for homes that require work. Construction can be notoriously difficult in California and nobody wants to be dealing with delays, rising costs, or disputes – so we’re often looking at turnkey properties.”
For the same reason, 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 Loretta. “It’s much less risk to the owner if there are staff on hand to deal with any emergency issues like water leaks and so on.”
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, assuming it would be automatic. 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 well-known Hollywood figures, and business leaders from Silicon Valley and other sectors. 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 residence questions
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”, but these terms are not defined based on a clear-cut checklist. “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.”
Nor is it possible to define residence based on a set number of days in the state, continues Naomita. “Even if a person is spending very little time here and their income arises in a different state, if their spouse is here, they could still be considered a resident with the low number of days creating adequate nexus. Another trap for the unwary is community property, which can apply to non-resident spouses and cause their income to be taxable in California if the other spouse is a California resident.”
If a client is likely to tip over into residency, the Withers team can help them either make changes so that they remain present only in a temporary, transitory capacity – or if they prefer, help them to manage their tax burden.
“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,” says 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.
Planning ahead
As always, it is helpful to seek advice at an early stage – and to plan for the long term, says cross border estate planning partner Michelle Graham. “Once a foreign individual owns real estate, the US will tax them when they sell it or gift it, and it will be subject to estate tax when they die.”
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,” Michelle says.
One Asian family narrowly avoided a difficult and expensive probate process with help from Naomita, after realizing their property portfolio was held in the name of an elderly relative. “An earlier generation had moved to California and ended up going back home,” Naomita recalls. “When I met them nobody lived in the US but they still held several properties in the grandmother’s name. We were able to restructure things so that the assets are not in her name and won’t be subject to US estate tax when she passes.”
Whether for tax or personal reasons, there will always be people who decide that California is not for them. However, there are also many push factors bringing new arrivals from overseas. In recent years the firm has helped a number of people who are concerned about political uncertainty or even facing threats of violence in their home countries. These individuals are happy to pay California taxes in exchange for a home in a safe, stable, and thriving economy.
For Michelle, at least, the lifestyle is second to none. “It is hard to beat living in a city where you can enjoy outdoor activities year-round,” she says. “We do see people leave, but we also see some of them come back. When you ask why, they say ‘Life is short. We’ll pay the taxes’.”