Nonresidents and Part-Year Residents

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The basics

California source income

Miscellaneous issues


Determine your residency status: Residents, nonresidents, and part-year residents

For detailed information about determining your residency status or California source income issues, refer to our publications page.

A California resident is any individual who meets any of the following:

  • Present in California for other than a temporary or transitory purpose.
  • Domiciled in California, but located outside California for a temporary or transitory purpose.
    • Domicile is defined for tax purposes as the place where you voluntarily establish yourself and family, not merely for a special or limited purpose, but with a present intention of making it your true, fixed, permanent home and principal establishment. It is the place where, whenever you are absent, you intend to return.
    • For a complete definition, refer to "Meaning of Domicile" in Publication 1031 - Guidelines for Determining Resident Status.

A nonresident is any individual who is not a California resident.

A part-year resident is any individual who is a California resident for part of the year and a nonresident for part of the year.

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How California taxes residents, nonresidents, and part-year residents

  • California residents - Taxed on ALL income, including income from sources outside California.
  • Nonresidents of California - Taxed only on income from California sources.
  • Part-year residents of California - Taxed on all income received while a resident and only on income from California sources while a nonresident.

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Compensation

Wages and salaries have a source where the services are performed. The source of this income is not affected by either of the following:

  • The location of the employer where the payment is issued
  • Your location when you receive payment

Residents - Include all wages and salaries earned while a resident, regardless of where the services were performed.

Nonresidents - Include the income for services performed in California.

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Business income

A nonresident’s income from California sources includes income from a business, trade, or profession carried on in California. If the nonresident’s business, trade, or profession is carried on both within and outside California and the part outside California is separate and distinct from the part within California, only income from the part conducted within California is California source income.

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Sale of stocks and bonds

The gain or loss from the sale of stocks or bonds has a source where you are a resident at the time of the sale. If buying and selling stocks and bonds is your trade or business, see Business income.

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Sale of real estate

The gain or loss from the sale of real estate has a source where the property is located. If you sell your California real estate and move out of state, the gain is taxable by California. The gain is taxable by California even if the real estate is sold when you are a nonresident.

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Partnerships, S corporations, and certain trusts

The income of a partner who is a part-year resident during any part of its own or the partnership’s taxable year shall compute his or her income in two distinct periods:

  1. Period as a California resident - California taxes income and deductions realized from all sources.
  2. Period as a California nonresident - California only taxes gross income and deductions realized from sources within this state.

This also applies to shareholders of an S corporation, partners of an LLC classified as a partnership, and beneficiaries of a trust.

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Installment sales

California taxes installment gains received by a nonresident from the sale of tangible property on a source basis. Real property is sourced and taxed based upon where the property is located. California taxes residents on all income regardless of source. Installment sales of intangible property are also sourced to California if the sale occurred while a California resident.

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Community property

Community property is all of the property that is not separate property acquired by a husband/registered domestic partner (RDP) or wife/RDP or both while domiciled in a community property state. Each spouse/RDP owns one-half of all community property.

If property cannot be specifically identified as separate property, it is considered community property. The following are community property states and U.S. territories:

  • Arizona
  • California
  • Guam (U.S. territory)
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Northern Mariana Islands (U.S. territory)
  • Puerto Rico (U.S. territory)
  • Texas
  • Washington
  • Wisconsin

Income generated from community property is community income. Community income also includes compensation for services if the spouse/RDP earning the compensation is domiciled in a community property state.

Divide the community income equally between you and your spouse/RDP when separate returns are filed.

Refer to the chart on page 12 of Publication 1031 – Guidelines for Determining Resident Status as a guide to split community income with your spouse/RDP based on domicile if you are married/RDP and file Long Form 540NR.

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Nonstatutory Stock Options (NQSOs)

An employee stock option is the right or privilege granted by a corporation to purchase the corporation’s stock at a specified price during a specified period. Stock option plans that meet the requirements of Internal Revenue Code (IRC) Sections 421-424 are referred to as statutory stock options; those that do not are referred to as nonstatutory stock options. IRC Section 83 governs nonstatutory stock options.

  • Statutory stock options consist of incentive stock options and employee stock purchase plans.
  • Nonstatutory stock options are all other options.

Generally, you recognize taxable wage income upon the exercise of a nonstatutory stock option. The difference between the fair market value of the stock on the exercise date and the option price is the taxable wage income.

If you exercise your nonstatutory stock options while a California resident, California taxes the difference between the fair market value of the shares on the exercise date and the option price because you are a resident of this state when the income is recognized.

If you exercise your nonstatutory stock options while a nonresident, the character of the stock option income recognized is compensation for services rendered. California taxes the wage income you receive to the extent you performed services in this state, whether you were always a nonresident or were formerly a California resident.

If you performed services for the corporation both within and outside California you must allocate to California that portion of total compensation reasonably attributed to services performed in this state. One reasonable method is an allocation based on the time worked. The period of time you performed services includes the total amount of time from the grant date to the exercise date (or the date your employment ended, if earlier).

The allocation ratio is:

  • The number of California workdays from grant date to exercise date divided by the total number of workdays from grant date to exercise date.

The allocated income is:

  • Total stock option income multiplied by the allocation ratio.

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Incentive Stock Options (ISOs)

If you exercise an incentive stock option while a California resident or a nonresident and later sell the stock in a qualifying disposition while a nonresident, the income is characterized as income from the sale or disposition of intangible personal property having a source in your state of residence at the time you sold the stock. Accordingly, you are not subject to income tax by California even though the services that gave rise to the grant may have been performed in this state. An alternative minimum tax (AMT) adjustment must be made in the year you exercise the incentive stock option. Determine the source of the adjustment in the same manner as income from the exercise of nonstatutory stock options for regular income tax purposes.

If you exercise an incentive stock option while a California resident or a nonresident and dispose of the stock in a disqualifying disposition while a nonresident, the transaction is treated as if you exercised a nonstatutory stock option. The difference between the option price and the fair market value on the exercise date is wages. The source of the income is where you performed services between the grant date and the exercise date. No AMT adjustment is required if you dispose of the stock in the same year you exercise the option. However, if the stock is disposed of in a later year, then an AMT adjustment must be made in the year you exercised your incentive stock option. The source of the AMT adjustment is determined in the same manner as income from the exercise of a nonstatutory stock option for regular tax purposes.

For more information, refer to FTB Publication 1004 for a complete definition of Qualifying Disposition, Disqualifying Disposition, and Stock Option Treatment. 

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Other State Tax Credit (OSTC)

California allows a credit against net tax for tax paid to another state on income that is taxed by both states. Taxpayers cannot apply the credit against city, local, or foreign taxes paid.

Residents - How to claim the credit

  • The tax must be paid to a state that does not allow California residents a credit against taxes imposed by that state. See California Schedule S for a listing of the applicable states.
  • The income must have its source in the other state. California law and its associated case decisions are the authority for the determination of the source of income, or any matter affecting the computation regardless of any provision or interpretation of the law of the other state.
  • The same income must be taxed by both states. Generally, income that is taxed by California and the other state will be the same amounts. However, the double-taxed income amounts reported on California Schedule S, Parts 1(b) and 1(c) may be different because of differences in California and the other state’s tax laws, or because of basis differences.
  • Substantiation must be provided showing that a tax return was filed with the other state.
  • Substantiation must be provided that taxes were paid to the other state.

Nonresidents - How to claim the credit

  • The tax must be paid to a state that allows California residents a credit against taxes imposed by that state. See California Schedule S for a listing of the applicable states.
  • The same income must be taxed by both states. Generally, income that is taxed by California and the other state will be the same amounts. However, the double-taxed income amounts reported on California Schedule S, Parts 1(b) and 1(c) may be different because of differences in California and the other state’s tax laws, or because of basis differences.
  • Substantiation must be provided showing that a tax return was filed with the other state.
  • Substantiation must be provided showing that taxes were paid to the other state.

Part-year residents - How to claim the credit

  • Follow the resident rules for the portion they were residents.
  • Follow the nonresident rules for the portion they were nonresidents.

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