USA – CALIFORNIA Law and Practice Contributed by: Jennifer Jordan McCall, Matthew Perotti, Maria Williams and Alexandria Marx, Pillsbury Winthrop Shaw Pittman LLP
Exit Planning Exit planning should address federal expatriation tax, immigration status, transfer-tax domicile, and state residency. US citizens and certain long-term green card holders who expatriate may be subject to IRC sections 877 and 877A. For 2026, covered expatri - ate status may arise if the average annual net income tax liability threshold exceeds USD211,000, and the mark-to-market exclusion amount is USD910,000. Planning should also consider the tax consequences to US recipients of gifts or bequests from covered expatriates under IRC section 2801. Final section 2801 regulations became effective in 2025, making this a current consideration for 2026 planning. Consider creating a formal will or trust for any Cali - fornia property. Under California Probate Code Sec - tion 6402, non-citizen estates are subject to California probate rules if the decedent died before making a will. For those who have assets in other countries, it is especially important to have dual-compliant estate plans prepared. For California exits, clients should establish a new domicile and reduce California contacts before major income events. California residency is determined by facts and circumstances, so formal steps alone are not controlling. 1.5 Taxation of Real Estate Owned by Non- Residents and Non-Citizens Taxation of Real Estate Owned by Non-Residents Non-resident aliens and non-citizens are subject to United States and California income tax on income generated by real property located in the US, or California, respectively. The US tax is a flat 30% flat rate, or lower treaty rate of the resident country, if the property is not effectively connected with a US trade or business. Non-resident aliens can elect to treat all income from US real property as effectively connected income with a trade or business, which then allows deductions related to the property to be used to reduce taxable income. At sale, capital gains are taxed in the same manner as if it were sold by a US citizen. Non-residents are also subject to a 15% non-resident withholding tax on the gross sales pro - ceeds unless the non-resident seller is exempt from
the withholding, either because it is a low-value sale (under USD300,000) or if withholding is reduced or eliminated under a treaty between the non-resident jurisdiction and the US. To request a reduction or dis - pensation from withholding on dispositions of US real property use IRS Form 8288-B. In California, non-resident aliens and non-citizens are taxed on real estate income and may take advantage of deductions, exemptions and other rules to reduce taxable income from real property in the same manner as US citizens. 1.6 Stability of Tax Laws In 2021, 2022, and 2023, California lawmakers pro - posed a bill (most recently, California AB 259) that would impose a 1% annual wealth tax on households with a net worth of more than USD50 million and 1.5% on households worth more than USD1 billion. A ver - sion of the bill seeking to tax extreme wealth has been introduced multiple times. Some versions include an “exit tax”, seeking to collect the wealth tax even after a taxpayer relocates to a new residence outside Cali - fornia. This has caused some uncertainty, and may be one factor for private wealth clients to establish resi - dency outside California. More recently, a 2026 Cali - fornia ballot initiative, the “2026 Billionaire Tax Act”, has been proposed that would impose a one-time tax of up to 5% on taxpayers and trusts with covered assets valued over USD1 billion. Another factor is the very high state income tax rates in California com - pared with other states, such as Nevada, Wyoming and Florida, which have a zero income tax rate. 1.7 Transparency and Increased Global Reporting The United States is not a signatory to the OECD’s CRS. California-based entities with business units that engage in multinational tax arrangements between any EU country and the US must comply with the EU DAC 6. FATCA and FinCEN Under FATCA US/California entities, individuals, insti - tutions, and trusts who hold financial assets outside the US and meet the income tax reporting threshold
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