Gain on Home Sale Taxed Regardless of Residency

QUESTION: I have a substantial capital gain position in a home in California in which I have resided for about 20 years. I plan to move to Nevada, establish legal residence there and then return to California and sell my home. I figure this way I can avoid taxation on that gain. The only problem is that I have heard a rumor that the state is considering a law that would allow the state Franchise Tax Board to recover state income tax on that gain. I guess the logic is that the state is entitled to tax on the gain inasmuch as the gain occurred in the state. What do you know about this?--A. B. G.

ANSWER: Well, we know your information is many years out of date. The state Franchise Tax Board has been collecting taxes on real estate gains for the past several decades, and it doesn’t matter at all where the seller calls home when the sale is made.

The basic law is that when you sell property in California--no matter where you live at the time of the sale--any taxable gain is subject to California state income tax as well as federal taxation. (By the way, the same principle applies to pension benefits. Pensions earned while working in California are subject to taxation by the state--even if you have long since moved out of California.)

It is possible that what you heard was the state’s latest attempt to increase its tracking of real estate sales by out-of-state residents. Until recently, the Franchise Tax Board has not had a particularly good method of policing such sales. But recently, assessors’ offices in most counties in the state have begun sharing computerized records of property sales and reassessments to help the tax board collect what the state is owed.

Still, there are legal ways to avoid or defer taxation on some or all your gains. If you are over age 55, you can exclude up to $125,000 of your gain from both state and federal taxes. (This exclusion can be used only once.)

You can also buy a home in Nevada that is worth more than the one you sold in California and defer taxes on your profit. However, the purchase must be made within two years of the sale of the previous house. “Anything else,” says Franchise Tax Board spokesman Jim Rebur, “would be cheating.”

Q: I am trying to do some pre-retirement planning before it’s too late to do much good. I’d like to find a competent, qualified financial adviser who can advise me how best to handle my profit-sharing and pension plans at work, as well as my own personal investments. Can you tell me how to find such a person, or am I living in a dream world?--G. E.

A: You are smart to do your financial planning while you still have time to take advantage of whatever strategy you adopt. And you are just as smart to realize that financial planners come with a variety of qualifications and methods of conducting their businesses. Basically, anyone can claim to be a financial planner, so the consumer must be careful. Choosing a good financial planner who understands your goals and investing temperament can be difficult, but it is not impossible.

As with finding any professional, the best recommendations come from friends or relatives who can share their personal experiences and advice. Your family lawyer and accountant are other important sources of informed referrals. Ask these professionals whom they use for their own financial planning and to whom they refer their clients. Ask for a candid assessment of the planners’ professional abilities. Presumably, if you trust your attorney and CPA, you should trust their judgment on this matter.

Here are some questions to ask the planners you are considering hiring: How long have you been in this business? How have you prepared for this job? What job did you have before becoming a financial planner?

You might also ask the planners to give you the name of clients they have worked for. Of course, they are not intentionally going to pass on the name of dissatisfied clients, but you can still learn a lot from clients who profess to be pleased with the services they received.

Here are some sample questions: Would you select this planner again? What are his strengths and weaknesses? Are you faithfully following the advice he gave? What would you do differently if you had a chance to do it all over again? How has the planner’s advice made a difference in your financial affairs?

County courthouse records are another source of information to check before hiring a planner. Search the criminal and civil filings to be sure your prospective planner has not been sued by a disgruntled client or, worse yet, charged with a crime.

Obviously, a planner who advises you to buy investments that pay him a commission has a built-in bias towards those investments, and you may want to avoid this type of planner. Advisers who charge a flat fee, whether an hourly charge or a prearranged amount, generally do not stand to benefit from recommending one course of action over another.

However, the fee-only adviser may not be able to help clients carry out his recommendations. Clients face additional fees charged by stockbrokers, insurance agents or other sales representatives to execute the planner’s advice.

Be careful if your planner refers you to any sales agent to execute the plan. Ask if there is any professional connection between their practices to be extra sure that the advice you are following was given strictly for your benefit. To determine that recommendations are not just meant to generate commissions, ask the planner to disclose how much money he will make if you follow the recommendations.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.