For company founders and shareholders with an exit on the horizon, this isn’t a myth. Learning how to minimize capital gains tax on a business sale can make a lot of financial sense.
In tech hubs like the Bay Area and New York City, the highest tax brackets are at 14.4% (as of 2025) and 14.8%, respectively. In contrast, states like Florida and Texas have no state income tax, meaning there’s no capital gains tax on a business sale at the state level.
Let’s consider the numbers: On a $30 million exit, a founder could save approximately $4.3 million by moving from California to Florida or approximately $4.4 million by moving from New York City to Florida. That’s a lot of incentive to pull up the stakes and head to Miami.
However, many times it’s not that simple. We all know that moving can be a tough decision, especially for those with strong roots in their community. Leaving behind your favorite golf course, local ski mountain, and your friend group can have a serious impact on your quality of life, regardless of whether it’s pre- or post-exit. And it can be heart-wrenching to pull your kids away from the home, friends, and school they know and love.
That said, sometimes the tax savings at the state level can improve the overall quality of life for a family, making it sensible to move for tax reasons. This is where some people can get into trouble when considering relocating to another state.
What You Need to Know About Moving to Save on Taxes
Paying less in state taxes isn’t as simple as packing up, skipping town, and resurfacing with a new address in a tax-friendlier state.
As tempting as it may be, you can’t keep a foothold in Silicon Valley while dipping your toe in the Gulf Coast and still save on state tax on business sales. The kids may be unable to stay in their Manhattan private school while you relocate to Miami.
Living in both states won’t save you here; when it comes to taxes, you must be all-in at your new address, or you’ll likely owe taxes at your old address. Unfortunately, some may not realize this until after they have spent a lot of time, money, and emotional investment.
Every state has its own rules for determining your residency for tax purposes, and you will not be able to fly under the radar if you’re a high-net-worth individual or top earner. High-tax states like New York or California pay especially close attention to those in the highest tax bracket. If you stop paying taxes at the state level, chances are the state will notice and challenge your new residency claim.
In other words, post “moving”, you may unfortunately be in for an audit.
In particular, California’s Franchise Tax Board is known to be vigilant in monitoring individuals who attempt to terminate their California residence, making it all the more crucial to thoroughly plan and document your move.
Additionally, it’s important to consider the complexities of where your spouse lives, as this may affect your capital gains tax on business sales if your spouse resides in California, even if you move to a lower-tax state. Proper legal and tax advice is essential for navigating these issues and ensuring a smooth transition.
Many people mistakenly think that splitting time between states and claiming the more favorable tax jurisdiction is easy. But when you have the means to travel and maintain more than one home, this doesn’t mean you get to choose the domicile that works most favorably for you when tax time comes. Simply spending 183 days of the year outside your high-tax state isn’t likely going to shrink your capital gains tax rate by state.
Even after leaving high-tax states like New York or California, it’s important to be aware of potential tax obligations tied to passive income sources within those states. For example, if you continue to have passive income from partnerships, investment properties, or other sources within New York or California, you’ll need to file a nonresident return and pay taxes on that income in those states.
Additionally, having passive income sources in your former state can increase the likelihood of a residency audit. As a result, it’s important to carefully consider whether retaining those investments producing state-specific income aligns with your overall financial and tax planning goals.
Preparing to Move
If you’re considering how to minimize state tax on a business sale by moving, it’s crucial to plan ahead and be prepared. The more time you give yourself before your company’s exit, the better off you’ll be. We recommend making a clean break from your high-tax state several years in advance to ensure a smooth transition. It’s also wise to assume that you may be subject to a state tax audit, so keep meticulous records and be prepared.
Saying you were away isn’t enough to minimize state tax on a business sale. An audit will look for logs and calendars that track your whereabouts and activities throughout the year. And if you’re thinking of fudging it or estimating where you were and what you were doing at a later date, think again. Technology can track your exact location at practically any given time. For example, credit card purchases and phone records have been the “gotcha” in far too many audits for taxpayers to claim ignorance.
Fortunately, technology can come to the rescue when it comes to keeping track of your whereabouts for tax purposes. There are day-tracking apps that can record and organize your location data, making it easier to prove your residency in the event of an audit. It’s important to note that the burden of proof is on you. The state auditors typically take the position that you were there every day you can’t prove you were somewhere else.
Hence, the value of good contemporaneous record-keeping, with or without an app, is vital for minimizing state tax gains tax on business sales. For founders, using these apps can simplify the process and provide peace of mind as they accurately document their residency status.
With the help of your tax advisor, it’s up to you to be familiar with the subjective domicile test for your primary state — the measure of your true, primary residence. Remember, the state will review various items to determine where your “intent” to live is and whether your move is considered permanent or temporary. Some examples that are considered include
- Where you are registered to vote.
- Where your vehicles are registered.
- Establishment of bank accounts.
- Location of clubs, gyms, and other organizations where you hold membership.
- If you own a home in California or have keys to an apartment in New York.
- Where you spend your weekends and holidays.
- Where your spouse and children live.
- Location of your place of work.
- Where you own a business or most often conduct business.
- Location of your doctors’ offices.
Your actions and how you present yourself should be consistent with a permanent and not a temporary move. Have you told your friends and neighbors that you’re moving? Did you set up a forwarding address at the post office?
Have you taken steps to register to vote or find a new dentist? Not everything is a dealbreaker, but anything that can be considered inconsistent with a permanent move can potentially count against you.
Common Mistakes to Avoid When Moving for Tax Purposes
Even with the best intentions, some founders still find themselves in hot water trying to save from paying capital gains tax on a business sale by moving in advance. The possibility of a residency audit means you must be diligent about checking off all the right boxes. There are no safe shortcuts or workarounds.
Here are examples of common mistakes to avoid
- Owning a home in New York or California while renting in Florida.
- Exaggerating travel day estimates, which can be easily discovered via technology and financial records.
- Owning a business in New York or California and living in Florida, claiming to work from home when you’re actually in the office often.
- Suddenly traveling more often just to say you spend more days out of the state without actually moving your home base.
- Claiming you live in Florida when your spouse and children live in New York or California.
- Putting off selling your home in your old state without renting it out.
- Moving too close to selling your company or equity without fully establishing your new residency.
Simply put, moving states to save from paying state tax on a business sale is a legitimate strategy, but you must be committed to moving forward and demonstrate that you intend to make it a permanent move to a new domicile.
How Close to a Transaction Can You Move?
There is no cut-and-dried answer to this question regarding the tax implications of moving to another state. In high-tax states like California and New York, where domicile is being disputed, an important factor will be your intent behind the move and proving that this is a permanent move rather than temporary. For example, you will not have a good case if you move down to Florida from New York a week before your company is sold.
It’s also important to consider certain technical rules when it comes to timing your move relative to paying state tax on business sales. For instance, if there’s a signed contract to sell your company with no major contingencies left to clear between the signing and closing dates, the effective date for the transaction is likely the signing date, not the closing date — regardless of the time lag between the two dates.
Additionally, some states, such as New York and California, have specific rules regarding stock option exercises. These rules may treat option exercises as being sourced back to the state where you were living when the options were earned. So, if you earned options while living and working in New York, you may still owe New York state tax when you exercise those options, even if you’ve since moved to a lower-tax state like Florida.
Contrarily, If you planned in advance, established a domicile in Florida, moved your company headquarters down to Florida, sold your New York home, bought a new home in Florida, then sold your company two years later, you’d likely have a much better chance at proving your intent.
Long-Term Benefits of Moving to Save on Taxes
Even if you are unable to relocate and time your move before selling your company, it’s important to recognize the significant impact that tax implications of moving to another state can have on the compounding of your wealth over time.
By residing in a state without income tax and avoiding the tax drag on your investment portfolio, you have the opportunity to maximize your financial growth. Even if you end up paying taxes in your high-tax state due to the timing of your move and company exit, it may still be worthwhile to evaluate whether a future relocation for long-term tax optimization makes sense.
Capital Gains Tax Rate by State: A Comprehensive Breakdown
Knowing the capital gains tax by state is crucial for founders planning an exit strategy. The variation in state-level capital gains taxation can significantly impact your net proceeds from a business sale.
Below is a comprehensive breakdown of capital gains tax rates across all 50 states
| State | Capital Gains Tax Rate | Treatment | Notes |
|---|---|---|---|
| Alaska | 0% | No capital gains tax | No state income tax |
| Florida | 0% | No capital gains tax | No state income tax |
| Nevada | 0% | No capital gains tax | No state income tax |
| South Dakota | 0% | No capital gains tax | No state income tax |
| Tennessee | 0% | No capital gains tax | No state income tax |
| Texas | 0% | No capital gains tax | No state income tax |
| Wyoming | 0% | No capital gains tax | No state income tax |
| California | 13.3% | Same as ordinary income | Highest rate in nation |
| New Jersey | 10.75% | Same as ordinary income | For high earners |
| New York | 10.9% | Same as ordinary income | Includes local taxes |
| Minnesota | 10.85% | Higher than ordinary income | Additional tax on investment income |
| Massachusetts | 9.0% | Same as ordinary income | Income/gains below $1mn is 5%Flat rate |
| Oregon | 9.9% | Same as ordinary income | No sales tax |
| Vermont | 8.75% | Same as ordinary income | Progressive rates |
| Hawaii | 7.25% | Same as ordinary income | Island state premium |
| Maine | 7.15% | Same as ordinary income | Progressive rates |
| Washington | 7.0% | Special capital gains tax | Only on gains over $250,000 |
| Connecticut | 4.75% | Same as ordinary income | Progressive rates |
| Delaware | 6.6% | Same as ordinary income | No sales tax |
| Rhode Island | 5.99% | Same as ordinary income | Progressive rates |
| Virginia | 5.75% | Same as ordinary income | Progressive rates |
| Maryland | 5.75% | Same as ordinary income | Plus local taxes possible |
| Iowa | 5.7% | Same as ordinary income | Being reduced over time |
| Wisconsin | 5.35% | Lower than ordinary income | Preferential treatment |
| Pennsylvania | 3.07% | Same as ordinary income | Flat rate |
| Utah | 4.55% | Same as ordinary income | Flat rate |
| Colorado | 4.254% | Same as ordinary income | Flat rate |
| North Carolina | 4.5% | Same as ordinary income | Flat rate |
| Georgia | 5.49% | Same as ordinary income | Recently flattened |
| Missouri | 4.8% | Same as ordinary income | Progressive rates |
| Louisiana | 4.25% | Same as ordinary income | Progressive rates |
| Oklahoma | 4.75% | Same as ordinary income | Progressive rates |
| Kentucky | 4.0% | Same as ordinary income | Flat rate |
| Indiana | 3.05% | Same as ordinary income | Flat rate |
| Ohio | 3.5% | Same as ordinary income | Progressive rates |
| Illinois | 4.95% | Same as ordinary income | Flat rate |
| Michigan | 4.25% | Same as ordinary income | Flat rate |
| West Virginia | 5.12% | Same as ordinary income | Progressive rates |
| Alabama | 5.0% | Same as ordinary income | Allows federal deduction |
| Mississippi | 4.7% | Same as ordinary income | Recently flattened |
| Kansas | 5.7% | Same as ordinary income | Progressive rates |
| Nebraska | 5.84% | Same as ordinary income | Progressive rates |
| Arkansas | 2.4% | Lower than ordinary income | Preferential treatment |
| South Carolina | 3.92% | Lower than ordinary income | Preferential treatment |
| New Mexico | 3.54% | Lower than ordinary income | Preferential treatment |
| Arizona | 1.875% | Lower than ordinary income | Preferential treatment |
| Montana | 4.1% | Lower than ordinary income | Preferential treatment |
| North Dakota | 1.5% | Lower than ordinary income | Preferential treatment |
Source: Tax Foundation “State Capital Gains Tax Rates, 2024” and state tax departments. The above table reflects top marginal tax rates if applicable.
The stark differences in capital gains tax rate by state demonstrate why location planning can be a critical component of exit strategy. Thirty-two states and the District of Columbia tax capital gains income at the same rate schedule that applies to ordinary income.
Meanwhile, only eight states apply lower effective rates to long-term capital gains. For instance, a founder with a $50 million exit could save over $6.6 million by properly establishing residency in Florida versus California before the transaction.
When Moving Is Not an Option
For founders who realize a move is not in the cards but still want to understand how to avoid capital gains tax on a business sale, there are some other advanced planning strategies for state tax optimization. These options can include using one or more trusts. Additionally, anyone expecting an exit larger than $10 million should be planning ahead and at least consider the options available for some advanced exit planning.
Advanced Strategies to Avoid Capital Gains Tax on a Business Sale
When exploring how to avoid capital gains tax on business sales beyond relocation, several sophisticated strategies merit consideration. These approaches can be particularly valuable for founders who cannot or choose not to relocate.
Installment Sales Structure
An installment sale allows you to spread capital gains tax on a business sale over multiple years, potentially keeping you in lower tax brackets. This strategy involves receiving payment over time rather than in a lump sum, which can significantly reduce your overall tax burden.
Qualified Small Business Stock (QSBS) Exemption
Section 1202 of the Internal Revenue Code provides substantial tax benefits for qualifying small business stock. Under QSBS, you may exclude up to $10 or $15 million, or 10 times your basis (whichever is greater) from federal capital gains taxation. This exemption can work in conjunction with state tax planning strategies. Some states, like New York, align with the federal QSBS guidelines, while others, like California QSBS, do not.
Charitable Remainder Trusts
For founders with philanthropic goals, charitable remainder trusts offer a way to defer capital gains tax on business sales while generating income and supporting charitable causes. By establishing the trust in a low-tax state before the sale, founders can maximize both their charitable deduction and lifetime income stream.
Timeline for Moving States Before a Business Exit
The timing of your tax planning relative to a business sale is crucial for maximizing the effectiveness of any strategy designed to minimize capital gains tax on a business sale.
3+ Years Before Exit:
- Establish residency in the target state
- Prove genuine intent
- Begin documenting domicile change and build a pattern of residency
- Consider QSBS planning and other tax strategies, if applicable
1-2 Years Before Exit:
- Finalize all residency documentation
- Sever old state ties
- Establish domicile markers
- Implement trust structures if appropriate
- Review installment sale possibilities
- Continue to document your intent
Understanding these timelines is essential when evaluating the tax implications of moving to another state.
The Bottom Line
Deciding whether to move to a lower-tax state is a complex decision and should be approached with a strategic mindset. It’s essential to carefully weigh the pros and cons, which can be both quantitative and qualitative, before making a final decision. In some cases, relocating can be a smart move, but it’s crucial to consider all the factors involved.
If you’re already considering a move down the line, syncing it with a potential future exit could be a wise decision. However, it’s important to keep in mind that moving states to save on taxes associated with an exit requires careful planning and preparation well in advance.
Frequently Asked Questions
Can you move states to avoid capital gains tax?
Yes, you can legally move states to reduce your capital gains tax on business sales, but it requires genuine relocation with documented intent to establish permanent residency. Simply moving shortly before a sale or maintaining significant ties to your previous state will likely result in owing taxes to your original state.
The key is demonstrating permanent relocation through actions. These can include changing voter registration, establishing new banking relationships, filing tax returns as a resident of the new state, severing old state ties, and transferring professional licenses well in advance of any transaction.
Do I have to pay capital gains in two states?
Generally, no. You should only owe capital gains tax to your state of legal residency at the time of the sale. However, complications can arise if you have ongoing business operations or passive income sources in your former state.
Some states may also challenge your residency status, potentially leading to tax obligations in multiple jurisdictions until the matter is resolved. Proper planning regarding the tax implications of moving to another state can help avoid these scenarios.
What states have zero capital gains tax?
Nine states currently impose no state-level capital gains tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Wyoming, and Washington (though Washington taxes capital gains over $250,000 at 7%).
These states either have no state income tax or specifically exempt capital gains from taxation. For founders curious about how to avoid capital gains tax on business sales, establishing residency in one of these states can result in substantial tax savings.
