Moving from California to Texas takes state tax off the interest an installment note pays. For some intangibles sold after a bona fide move, it takes it off the gain too. Sell California real estate, sell before you move, or leave the wrong entity in the middle, and California keeps taxing the gain in every payment year no matter where you live. Every CPA should run the two-step analysis below before structuring an SIS.
The federal half is simple. IRC §453 spreads recognized gain over the payment years no matter where you live. Move from CA to TX and the federal calculation doesn't change a basis point.
The state half is where the money is. Each year's recognized gain is taxable somewhere, but California's claim depends entirely on (a) what you sold and (b) what entity sat between you and the asset. Get the right combination and complete a bona fide move before the sale, and California has no claim on the gain. Sell while you are still a California resident and California keeps taxing the gain in every payment year even after you move; only the interest you receive after the move escapes (FTB Pub. 1100, Section C, Example 8). Sell California real estate and California taxes the gain regardless of where you live.
The best fit: SIS-eligible intangibles (closely-held C-corp or S-corp stock, partnership interests in a non-CA-real-estate business, business goodwill from a direct individual-level sale, out-of-state real estate held by a soon-to-be-nonresident) sold after bona fide residence is established in a no-tax state. Structure it through an assignment company funded by a fixed annuity from a highly rated life insurer, and the savings add up every payment year.
Send me the sale price and rough basis. Within one business day I'll email you the actual number and the Seller's Guide to §453. If it doesn't fit your deal, I'll tell you that plainly.
No retainer · no obligation. Hans Goldstein, a licensed insurance agent (CA Insurance License #4273294), will contact you and may discuss insurance products, including annuities.
Before the state-sourcing analysis matters, the asset has to actually qualify for installment-sale treatment under IRC §453. A lot of things people think qualify don't:
Question 1: What's the asset's sourcing rule? California taxes nonresidents only on income from California sources. The source rule depends on the asset class:
Question 2: Did the gain pass through a pass-through entity (S-corp, LLC, partnership) that operated in California? If yes, the default residence-sourcing rule for intangibles can be overridden by California's apportionment rules. This is where the traps live.
▸ The asset-by-asset map| What you sold | §453 eligible? | Escapes CA on the gain if you move to a no-tax state? | Why |
|---|---|---|---|
| Privately-held C-corp stock (direct sale by individual) | YES | ONLY IF you move before the sale | Intangible. Sourced to your residence on the sale date. Sold while a CA resident = CA-taxed in every payment year (Pub. 1100 Ex. 8). |
| Privately-held S-corp stock (direct sale by individual) | YES | ONLY IF you move before the sale | Same as C-corp stock. Intangible, sourced to residence on the sale date. |
| S-corp or LLC asset sale of CA business (incl. goodwill) | YES | NO (trap) | Apportioned at the entity level to CA. Metropoulos (2022). See trap callout below. |
| Partnership / LLC interest (no CA real estate inside) | YES (non-hot portion) | PARTIAL | Non-hot intangible portion: sourced to your residence on the sale date. §751 hot-asset portion: apportioned to CA per FTB Legal Ruling 2022-02. |
| Direct individual asset sale (sole prop, Schedule C, disregarded LLC): goodwill / customer lists | YES | ONLY IF you move before the sale | No pass-through entity sitting between. Intangible, sourced to your residence on the sale date. |
| California real estate (any kind) | YES | NO | Sourced to property location. CA taxes the remaining gain forever. |
| Out-of-state real estate (sold while you're a nonresident) | YES | YES | Sourced to property location, not CA. CA never had a claim. |
| Publicly-traded stock | NO | YES (but not via SIS) | §453(k) excludes publicly-traded securities. Regular sale after move-out works. |
| Inventory / dealer property | NO | n/a | §453(b)(2) / (l) excludes. |
| Depreciation recapture portion of any sale | NO (yr-1 recognition) | n/a | §453(i): recapture recognized immediately, can't be spread. |
| NQDC paid out over 10+ substantially equal annual installments | n/a (not an SIS) | YES (different statute) | 4 USC §114 protects this directly, no SIS needed. |
| Qualified retirement plan distributions (401k, IRA, pension) | n/a | YES (different statute) | 4 USC §114: only the residence state can tax. |
| Cryptocurrency, IP royalty streams | TECHNICALLY | DEPENDS | Property under IRS guidance, but assignment companies rarely structure SIS around these. Case-by-case. |
Moving to Texas does not remove California tax on the gain from California property. Every installment has a gain portion and an interest portion. The gain portion of each payment stays California-source income and stays taxable by California after you leave. The same is true for stock or other intangibles you sold while you were still a California resident (FTB Publication 1100, Section C, Examples 7 and 8).
What changes is the interest the note pays. Interest is taxed by your state of residence when you receive it, so once you are a bona fide Texas resident, the interest portion carries no state income tax. On a 20-year note, the interest is a large number.
| Stay in California | Move to Texas | |
|---|---|---|
| Monthly payment (level, amortizing) | ≈ $12,946 | ≈ $12,946 |
| Total interest over 20 years | ≈ $1,107,000 | ≈ $1,107,000 |
| Federal tax on interest | 35% + 3.8% NIIT | 35% + 3.8% NIIT |
| State tax on interest | 9.3% (11.3% bracket) ≈ $103,000 ($125,000) over 20 yrs | $0 |
| After-tax yield on the note | ≈ 2.48% (2.38% at 11.3%) | ≈ 2.92% |
| Gain portion of each payment | CA-taxable | Still CA-taxable (CA-source) |
The difference: about +0.44 to +0.54 percentage points of after-tax yield every year, and roughly $103,000 to $125,000 of California tax on the interest avoided over the 20 years. The tax on the gain is the same in both columns.
Illustrative only, not a quote or a projection. Assumes a level monthly amortizing note held to term, interest taxed as ordinary income at a flat 35% federal marginal rate plus 3.8% net investment income tax, California at a flat 9.3% or 11.3% marginal rate, no federal deduction for state tax, Texas residency in place for all 20 years, and no change in rates or law. Federal and California tax on the gain portion is identical in both columns and not shown. Your rates, bracket, note terms, and timing will differ.
In 2009 Metropoulos Family Trust v. Franchise Tax Board (Cal. Ct. App. 2022), the court ruled that when an S-corp sells its operating assets, including goodwill, the resulting gain is "business income" apportioned at the S-corporation level using California's apportionment factors, not sourced to the nonresident shareholder's state of residence. The OTA followed the same reasoning in L. Smith (2022) for conduit holding entities.
In plain terms: if your CA business is owned by an S-corp or LLC and the deal is structured as an asset sale (which buyers usually prefer for basis step-up and successor-liability reasons), the goodwill component stays CA-source even after you've moved to Texas. The residence-sourcing rule for intangibles doesn't save you because the pass-through entity, not you, is the seller of the asset.
The cleaner route: sell the stock of the entity directly, not the underlying assets. Stock = intangible = sourced to the shareholder's residence on the sale date, so this only helps if you are already a bona fide nonresident when you sell. This is a deal negotiation problem, not a tax problem: buyers want asset sales for the step-up; you want a stock sale for the source rule. Get a CA tax attorney involved before the LOI is signed.
Selling a partnership or multi-member LLC interest as a nonresident? FTB issued Legal Ruling 2022-02 in July 2022 splitting the sale into two pieces for state sourcing:
And if the underlying partnership owns California real property, that real-property component follows the property-location rule. So the residence-sourcing benefit applies only to the cleanly intangible portion of the interest. Get the K-1 and a tax attorney on the line before structuring.
▸ Why federal §114 doesn't save an SIS4 USC §114 (the Pension Source Tax Act of 1996) prohibits states from taxing former residents on certain "retirement income": qualified plans, IRAs, and a specific subset of NQDC arrangements paid out over 10 or more substantially equal annual installments. It is a real benefit for executives moving out of a high-tax state.
It does not apply to installment-sale gain under §453. The legislative text is explicit: the protection covers "retirement income" defined as distributions from qualified plans, governmental plans, and specifically-structured NQDC. SIS payments don't fit any of those buckets. If anyone tells you "§114 protects your SIS payments from CA tax after you move," they're conflating two different statutes. The relief for SIS gain comes from the asset-class sourcing analysis above, not from §114.
▸ Assignment company optionsFor an SIS to work, the buyer's installment payment obligation has to be assigned to a non-related third party, the "assignment company." It owes you the payments and funds them with a fixed annuity it owns. Two kinds are active in the market:
Usually an affiliate of the highly rated life insurer that issues the fixed annuity. Best for: shorter-to-medium durations (5 to 30 years) and straightforward real-estate and business-sale cases.
Used for longer time horizons or deferred-start schedules where mainstream insurers won't quote. Its domicile, regulator and the insurer behind its annuity must be disclosed in writing, and they deserve extra scrutiny from your own advisers.
Either way, you are an unsecured creditor of the assignment company, and your payments depend on it and on the insurer behind its annuity. No IRS ruling specifically approves the assignment structure, so have your own CPA or tax attorney review it. The choice between them is a function of duration and rate competitiveness on the case. See our full breakdown of the assignment-company structure.
▸ The realistic sweet spotPutting Steps 1 and 2 together, the cases where the move-to-no-tax-state strategy meaningfully improves the SIS math (instead of just deferring federal tax) are these:
Note what's missing from this list: CA real estate sales. SIS still works on CA real estate as a federal-deferral tool, but the move-out-of-CA story doesn't apply. CA taxes that gain forever based on property location.
▸ The team you needAn SIS-plus-relocation strategy isn't a single-discipline problem. Three workstreams have to be coordinated:
If any one of these three is missing or working in isolation, the deal either gets structured wrong upfront (the Metropoulos trap, the §751 hot-asset surprise) or the residency planning happens too late (if you are still a California resident on the sale date, California taxes the gain in every payment year no matter where you live when the payments arrive). Get all three at the table before the LOI is signed.
▸ FAQYes, on the gain. The gain portion of each installment from California real property stays California-source income and remains taxable by California after you move, and the same is true for stock or other intangibles you sold while a California resident (FTB Publication 1100, Section C). The interest portion is different: interest is taxed by your state of residence when you receive it, so once you are a bona fide Texas resident, the interest carries no state income tax, unless the note has a business situs in California. Have tax counsel confirm your facts.
Send the high-level facts (what asset, what entity, what state you're considering, what timing). Hans will model the SIS math, flag any Metropoulos / §751 / location-rule traps, and tell you whether the move-out strategy actually pencils for your situation. You get it in writing before you do anything irreversible.
Talk to Hans: 213-414-2808