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I live in two states: where do I file a tax return? How can I use my money in a 1031 Exchange?

by Elizabeth Watts, CPA

I moved from California to Oregon recently, but I telecommunityute to a company based in California. I spend most of my time in Oregon, but still maintain a residence in California and return every so often for work purposes. With which state am I required to file an income tax return?

The simple answer is that since income is generated in both California and Oregon, you must file a return with both states. This then poses another question. What is your resident state? The answer to this question will determine the residency status for each state and which tax forms to use when filing with each state.

For California, a 'resident' includes (1) every individual who is in the state for other than a temporary or transitory purpose, and (2) every individual who is domiciled in the State who is outside of the State for a temporary or transitory purpose. All other individuals are nonresidents. Upon initial review, it would appear that you ceased to be a resident when moving out of California. However, you have connections with both California and Oregon, so have you indeed ceased to be a California resident? Was this move permanent or temporary in nature? Since you did not change employers, was this move by employer request and for what duration of time? In Oregon, a taxpayer is considered a resident if all of the following are true:

  1. taxpayer thinks of Oregon as permanent home
  2. Oregon is the center of your financial, social, and family life
  3. Oregon is the place the taxpayer intends to come back to when taxpayer is away.

Whether a move out of California and into Oregon is permanent in character will depend to a large extent upon the facts and circumstances of each particular case. The underlying theory is that the state with which a person has the closest connection during the taxable year is the state of his residence.

Closely connected to the issue of whether a move is permanent or temporary in nature, is the question of 'domicile.' A domicile has been defined as the place where an individual has his or her true, fixed, permanent home and principal establishment; and to which place he has, whenever he is absent, the intention of returning. An individual can at any one time have but one domicile. If an individual has acquired a domicile at one place (i.e. California), he retains that domicile until he acquires another elsewhere.

If the facts and circumstances for this taxpayer indicate Oregon residency, you may need to prove your non-residency to California. This is due to the connections you still maintain in California. The type and amount of proof that will be required in all cases to rebut or overcome a presumption of residence and to establish that an individual is a nonresident cannot be specified in general but will depend largely again on the circumstances of each particular case.

Inasmuch as the status of an taxpayer as a resident or a nonresident during any one taxable year will generally depend upon activities and/or conduct during the entire year, it will not be possible, ordinarily, to determine his status until after the close of the year.

The information contained herein is general in nature. Since the determination of residency is based solely on individual facts and circumstances, taxpayers with residency questions are advised to obtain professional assistance from a Certified Public Accountant.

Elizabeth Watts, CPA , is owner of her own firm in Pasadena, Ca. The firm provides accounting, audit, tax, financial planning and management advisory services and specializes in working with the small business owners and closely held corporations.

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