(Bloomberg) -- “I am selling almost all physical possessions. Will own no house.”
By Elon Musk’s standards, his May 2020 tweet wasn’t all that weird. “Possessions kind of weigh you down,” he said on a podcast a few days later, and went on to list seven homes in California. In December, he announced he’d moved to Texas. His charitable foundation followed and, soon, Tesla Inc. will too.
But what first seemed like a case of billionaire wanderlust, or pique with California’s Covid restrictions, now looks more and more like shrewd anticipation of the big tax bill that’s coming Musk’s way.
The sale of the California properties — including a Bay Area luxury estate, a Bel Air mansion and a ranch house once owned by Gene Wilder — enable the Tesla co-founder to declare he’s no longer a resident of a state that’s home to the nation’s highest income taxes on the wealthy. At least five of the residences were sold to buyers who borrowed money from none other than Musk himself, property records show, helping smooth the way for deals to close.
The transactions will go into the complex, and at times opaque, evaluation of where the world’s richest man actually lives and should be taxed — an equation that’s especially important now that he’s been selling billions of dollars’ worth of Tesla stock.
It all comes down to timing: Musk needs enough length from his departure from California to avoid triggering issues with state authorities. Meanwhile, Democrats in Washington are pressing to raise federal rates on the superrich.
So far, the move from California may have saved Musk, 50, more than half a billion dollars in capital-gains taxes he’d otherwise have owed to the Golden State, according to calculations by Bloomberg News. By the time he sells the full 10% Tesla stake he has tweeted about, he could shave well over $2 billion from his tax bill simply by moving.
“His past activities have been laser-focused on trying to get out of California,” Daren Shaver, senior counsel at Hanson Bridgett in San Francisco, said of Musk. “That could be part of his master plan.”
Musk faces a much more favorable financial environment in Texas: The state has no state income tax or capital-gains tax on individuals.
Musk didn’t respond to a request for comment.
Musk — who has a $296 billion fortune, according to the Bloomberg Billionaires Index — has for years achieved a lower tax bill by borrowing against his Tesla shares rather than selling them. A December 2020 regulatory filing shows that various investment banks have lent him $515 million. The number of shares he’s pledged means he’s potentially borrowed billions more.
Before November, the last time Musk sold stock was in 2016.
“That’s a pretty savvy planning technique because you can borrow forever and, if you do it right, you can extract value that’s not taxable to you,” Shaver said. “There’s an interest charge on it, but that’s cheaper than the tax rate.”
In the past month, Musk has unloaded almost $10 billion of Tesla stock after an unusual Twitter poll asking if he should sell part of his stake. He would typically pay a 23.8% rate that applies to long-term capital gains. That applies not on the entire amount, but instead only on the gain on shares since he acquired them.
Some of the shares being sold are the result of the exercise of options, and have no capital gains component.
But he’s sold about 5.4 million of shares that he already owned. Since Tesla’s stock price is up more than 1,500% in the last two years — and far, far more since the company was founded in 2003 — that means he’ll owe 23.8% on nearly the entire sale price of those shares.
That would come to at least $1.35 billion based on $5.8 billion of shares sold so far. If Musk sells a full 10% of his stake excluding the options, the total tax due could increase to about $4.35 billion, based on Tesla's current share price. The total could be slightly lower if Musk sells shares with a higher cost basis.
California would ordinarily tack an extra 13.3% on his bill. That would amount to $2.4 billion — if Musk hadn’t exited the state. The fact that the vast amount of Tesla’s gains occurred while he was a resident aren’t relevant.
It’s a “blind spot in the tax system,” said Cristobal Young, a Cornell University sociology professor who studies taxes on the rich.
Musk is “basically shirking his tax responsibilities,” Young said. “California provided access to the talent he needed to build the company.”
Governor Gavin Newsom has also touted California’s role in Musk’s ascension, saying that its history of innovation and policies promoting clean energy paved the way for Tesla to become the behemoth it is today. A spokesperson for the state's Franchise Tax Board, which oversees tax collections, declined to comment, saying the law prohibits it from disclosing confidential information about individual taxpayers.
Escaping California’s taxes isn’t as simple as hopping on a private jet. The rules take into account a variety of criteria: Taxpayers need to show they’re actually cutting ties to the state, while physically relocating themselves and demonstrating they intend to “remain in the new locality permanently or indefinitely,” according to the tax board.
“That’s a complex analysis,” said Christopher Manes, an attorney in Palm Springs who specializes in California tax residency issues. “If he’s claiming he’s a nonresident, obviously California has an incentive to audit him and find out.”
A key issue is the length of time between an official move date and when a large transaction occurs. Taxpayers are generally advised to wait six months to a year, or risk facing California’s auditors.
For well over a year, Musk has been making moves that would bolster the case that he’s now a Texas resident. After the billionaire listed four of his Bel Air homes in May 2020 for $62.5 million, a Los Angeles developer, Ardie Tavangarian, announced that he’d reached an agreement to buy them.
The transaction took almost six months to close, property records show. They were transferred on Dec. 17.
The records also show that Musk personally stepped in as a lender on the transaction, providing Tavangarian’s company the full purchase price — in fact, Musk lent $62.3 million, while the properties were sold for $61.9 million.
Tavangarian didn’t respond to multiple requests for comment.
A fifth Bel Air property sold for $7 million in October. It, too, was financed by Musk, who provided a $6.7 million loan to the purchaser. Another was sold in June in an all-cash transaction.
A home in the San Francisco Bay area took longer to offload, but Musk never listed it as his personal address.
Musk can’t totally escape his tax obligations to the Golden State. Those options he exercised? If treated as compensation and subject to ordinary income taxes, California would generally still have a right to tax whatever was earned before he moved — probably the bulk of the options. That’s because the options are treated much like salary, as income paid to Musk for his work at Tesla.
But the timing of the exercise of the options could also be designed to reduce taxes. If he waited until August next year, when the options expire, he runs the risk of incurring additional taxes included in the latest version of the Democrats’ Build Back Better Act. The legislation, approved by the House of Representatives on Nov. 19, would create a new 8% surcharge on income above $25 million.
--With assistance from Romy Varghese.