2026-10-31 · 4 min read · Orange County
What Taxes Do I Owe California if I Keep My Home as a Rental After I Move Away?
The short answer
If you move out of California and rent out your Orange County home, the rent is generally California-source income, so you may need to file a California nonresident return each year, along with your federal return. When you eventually sell, California real estate withholding rules may apply, and how long you've rented the home can affect the federal home sale exclusion. This is general information, not tax advice. A CPA who works with California nonresidents is the right person to plan your family's situation.
Why Does California Still Tax My Rental After I Leave?
California taxes nonresidents on income from California sources. The Franchise Tax Board (FTB) lists rent from real property located in California as an example of California-source income.
I'm Jeanette Nelson, a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas. When families relocate, some decide to keep their Orange County home instead of selling right away. Knowing the tax picture helps your family compare both choices with clear eyes.
Will I Need to File a California Return Each Year?
Possibly. The FTB says a nonresident must file if they have California-source income and their gross income or adjusted gross income is above the filing threshold for their filing status, age and dependents.
Nonresidents generally use Form 540NR. The 540NR instructions say to complete your federal return first. If you move partway through a year, you may be a part-year resident for that year. My article on how to stop being a California resident for taxes explains how residency is decided.
Your new state may have its own rules about income from out-of-state property. Your CPA can look at both states together.
How Is the Rental Income Taxed?
The federal rules in IRS Publication 527 are the starting point for most landlords:
- Rent counts as income. The IRS says that in most cases, you must include in your gross income all amounts you receive as rent.
- Expenses can reduce it. The IRS says rental expenses such as maintenance, insurance, taxes and interest can be deducted.
- Repairs and improvements are treated differently. Repairs are generally deductible. Improvements are added to your basis and recovered over time.
- Depreciation applies. Residential rental buildings are generally depreciated over 27.5 years.
- A former home has its own starting point. When you convert a personal home to a rental, the IRS says the basis for depreciation is the lesser of your adjusted basis or the fair market value on the date you change it to rental use.
California generally follows many of these federal rules, yet it doesn't adopt every federal change. That's another reason to work with a CPA.
What Happens When I Sell the Rental Later?
The home sale exclusion. IRS Publication 523 explains that you may exclude up to $250,000 of gain, or $500,000 for married couples filing jointly, if you owned the home and lived in it as your main home for at least 24 months during the 5 years before the sale. Once you move out, that 5-year window keeps moving. Renting for a long time can mean you no longer qualify.
Depreciation. Publication 523 says you can't exclude the part of your gain equal to depreciation allowed or allowable for rental use after May 6, 1997.
California withholding. The FTB's real estate withholding rules generally require withholding of 3 1/3% of the sales price on California real estate sales, unless an exemption applies or the seller elects an alternative calculation based on gain. My article on whether California will withhold tax when you sell and move away explains this in more detail.
Property taxes. Your Prop 13 assessed value generally stays with the home while you own it. My article on what happens to your Prop 13 tax base when you leave California covers that question.
Questions to Bring to Your CPA
- Will I need to file in California, my new state, or both?
- What will my depreciation basis be when the home becomes a rental?
- How long can I rent the home and still qualify for the home sale exclusion?
- What records should I keep for income, expenses and improvements?
- How would withholding work if I sell while living out of state?
For your move itself, my article on what to update when you move out of California has a helpful list.
Let's Start With a Conversation
If your family is relocating and weighing whether to keep or sell your Orange County home, I'd love to have a private planning conversation with you and your family about your options and timing. Call or text me at 714.366.8575 | DRE: 01397168, or contact me. Jeanette Nelson is a REALTOR® with Jeanette Nelson Real Estate, Keller Williams Realty, serving Orange County, Huntington Beach, Costa Mesa, Fountain Valley, and surrounding areas.
Frequently asked questions
Do I pay California tax on rent if I live in another state?
Generally, yes. The FTB treats rent from California real property as California-source income for nonresidents.
What form do California nonresidents use?
Nonresidents with California-source income generally file Form 540NR, after completing their federal return.
Can I still get the home sale exclusion after renting my home?
Possibly. IRS Publication 523 requires that you owned and lived in the home for at least 24 months during the 5 years before the sale. Ask your CPA about your timing.
Is tax withheld when a nonresident sells California property?
Often. The FTB's rules generally call for withholding of 3 1/3% of the sales price unless an exemption or alternative calculation applies.