Navigating State Tax Laws for Multiple Homeowners: Key Considerations to Avoid Tax Traps

Key Takeaway

• Owning homes in multiple states requires careful planning to avoid tax traps, with a focus on establishing domicile to meet state tax laws.
• Financial advisers emphasize the importance of understanding and adhering to residency requirements to mitigate tax liabilities.
• Documentation and maintaining a substantial presence are crucial for audit preparedness and proving domicile status.

State Tax Considerations

As the trend of owning homes in multiple states becomes more prevalent, individuals must navigate complex state tax laws to avoid potential issues. Higher-tax states are vigilant in ensuring that homeowners are not evading taxes by claiming a lower-tax state as their domicile. Establishing domicile, or permanent home base, in a new state requires careful planning and adherence to specific rules to prevent tax complications.

Financial Advisers' Insights

Financial advisers working with high-net-worth individuals highlight the significance of understanding state tax laws when considering a second home purchase. Planning in advance can mitigate tax liabilities and prevent future hassles related to residency requirements and tax obligations. Clients are increasingly interested in acquiring second homes, with a notable portion aiming to transition these properties into primary residences.

Establishing Domicile

Determining domicile involves various factors, including where an individual spends the majority of their time, registers to vote, holds licenses and registrations, receives mail, and files tax returns. Maintaining a substantial presence in the chosen state is crucial to solidify domicile status and avoid residency disputes during audits or tax assessments. States are employing advanced technologies and resources to verify residency claims, emphasizing the importance of maintaining a clear and consistent record of domicile.

Audit Preparedness and Documentation

In the event of an audit, taxpayers must substantiate their domicile status to avoid being classified as statutory residents or domiciled in a specific state. Creating a comprehensive paper trail that demonstrates a legitimate change of domicile, supported by documentation such as furniture invoices, moving contracts, and rental agreements, is essential. Updating legal documents, like wills, to align with the laws of the new domicile state can further strengthen the case for a genuine change in residency.

Street Views

• Kelly Gillette, Armanino (Neutral on state-tax laws for multiple home ownership):

  "Understanding the rules in advance of the move can save a lot of potential taxes and hassles at a later date."

• Allen Injijian, Geller (Neutral on domicile and taxation):

  "Where you establish your domicile can make a big difference to your bottom line—and could amount to millions of dollars for wealthy families over many years... But the rules related to domicile and taxation are complicated so it helps to understand how states tax residents and nonresidents."

• Rob Burnette, Outlook Financial Center (Neutral on establishing domicile):

  "Make the state they spend more than half their time living in the state they want as their domicile. He advises them to plan to spend at least 185 days in that state, so they don’t have to worry about falling short of residency requirements during leap years."

• Michelle Espey, Farrell Fritz (Neutral on tax audits for multi-state homeowners):

  "If an auditor comes calling, the burden is on taxpayers to prove they aren’t a statutory resident or domiciled in that state... These audits are all fact-specific and they can be time-consuming."