How does California source carried interest when a partner changes residency?

The mobilia doctrine and the presumptive residency state contrast

California taxes a nonresident only on California-source income (Rev. and Tax. Code section 17951). For intangible personal property, meaning stocks, bonds, notes, and comparable interests including a partnership interest, the sourcing rule runs the other way from real property: income from intangibles is not California-source at all unless the property has acquired a business situs in the state (Rev. and Tax. Code section 17952; Cal. Code Regs., tit. 18, section 17952). The regulation defines business situs narrowly, as property employed as capital in a California business or whose possession and control has been localized in connection with a California trade, profession, or business, and it is not satisfied merely because the entity that issued the intangible operates in California. Absent a business situs, gain on the sale of stock, a note, or a partnership interest by a nonresident and nondomiciliary is sourced to the state where that person lives, the common law expression of which is mobilia sequuntur personam, movables follow the person. A California case has held that section 17952 does not reach a nonresident shareholder's pro rata share of an S corporation's California business income, which is characterized as if the shareholder received it directly from the business, and in doing so relied on Regulation 17951-4 (Valentino v. Franchise Tax Board (2001) 87 Cal.App.4th 1284). That distinction, gain on the interest itself versus income earned through the activity behind it, is the fault line carried interest sits on.

Getting to the residence side of that sourcing question requires first winning the residency question, and California makes that harder than it looks. Outside the narrow employment-contract safe harbor of Revenue and Taxation Code section 17014, subdivision (d), California has no fixed day count that decides residency by itself; it is a presumptive residency state, where day counts raise rebuttable presumptions and the full record of ties and conduct decides the outcome, in contrast to the statutory residency states common elsewhere, where a fixed day count written into the statute controls residency without more. A partner planning a residency change around a carried interest realization event needs the change itself to be defensible on the merits, a separate and demanding inquiry, before the sourcing analysis below has anything to operate on. Assuming for purposes of this article that the residency change is sound and that the partner is a nonresident and nondomiciliary of California when the carry is recognized, mobilia sourcing under section 17952 would ordinarily source the gain to the new state of residence and take it outside California's reach entirely. No accrual rule reaches back to the period of residence: former Revenue and Taxation Code section 17554, which included in the computation income accrued before a change of residence, was repealed for taxable years beginning on or after January 1, 2002 (Stats. 2001, ch. 920), and section 17041(i) now taxes all income for the part of the year the taxpayer was a resident and only California-source income for the part of the year the taxpayer was not, without regard to the taxpayer's method of accounting (FTB Legal Ruling 2003-1).

Why carried interest resists the doctrine

A carried interest California sourcing question starts from an uncomfortable premise: carried interest is not an ordinary investment gain. It is a profits interest granted to a fund manager in exchange for investment management services, and its value is built, year by year, through work performed for the fund, work that in many cases is performed while the manager is still a California resident even though the interest does not convert to cash, and the gain is not recognized, until years later, often after a move. That timing gap is what makes the mobilia analysis uncomfortable. Mobilia sourcing assumes the income is fairly attributed to ownership of a movable asset wherever that owner happens to sit; carried interest is at least partly attributable to labor performed at a fixed location, which is the paradigm the compensation sourcing rules were built for, not the paradigm the intangible property rules were built for.

Section 17951's implementing regulation addresses that paradigm for compensation: a nonresident's income from personal services performed partly within and partly without California is allocated between the two based on where the work was done, typically by a working-days ratio for services performed in intermittent or overlapping periods (Cal. Code Regs., tit. 18, section 17951-5). Under that framework, service income earned for time physically spent working in California is California-source income regardless of where the recipient is living when it is finally paid, and regardless of whether the recipient has since become a nonresident. That rule is not contested and does not turn on holding periods or federal characterization; it turns on where the work happened. The open question for carried interest is not whether services performed in California can generate California-source income after a residency change; they can. The open question is whether a carry, characterized as capital gain for federal tax purposes, should instead be pulled into that compensation-sourcing framework because of the services that produced it, and if so, how much of it, and on what trigger.

The third frame: the distributive share rule of Regulation 17951-4

Framing the question as a choice between mobilia sourcing and compensation sourcing leaves out the rule that reaches most carried interest before either of them does. A carry is ordinarily a partnership interest, and the income it produces ordinarily arrives as a distributive share rather than as proceeds from a sale. California Code of Regulations, title 18, section 17951-4 governs the California source income of a nonresident partner in a partnership carrying on business within and without the state, and Regulation 17951-4(d)(1) provides that the total business income of the partnership is apportioned at the partnership level under the Uniform Division of Income for Tax Purposes Act rules of Revenue and Taxation Code sections 25120 through 25139, with the nonresident partner's California source income determined from that apportioned result. Source is set by the partnership's own activity and factors, not by where the partner lives and not by where the partner personally worked.

For a fund that qualifies as an investment partnership, Revenue and Taxation Code section 17955 comes ahead of Regulation 17951-4. Notwithstanding sections 17951 through 17953, it excludes from a nonresident partner's California source income the partner's distributive share of interest, dividends, and gains from qualifying investment securities, whether or not the partnership has a usual place of business in California. The exclusion does not apply to income from investment activity that is interrelated with a California trade or business of the nonresident, or of an entity in which the nonresident owns an interest, whose primary activities are separate and distinct from acquiring, managing, or disposing of qualified investment securities. For a carry holder, whether the fund qualifies and whether that interrelation exception reaches the management activity will often decide the question.

Regulation 17951-4 can decide the question before either of the other two rules is reached. Where the carry pays out as a distributive share of partnership business income, Regulation 17951-4 assigns a California share by the fund's apportionment factors: section 17952 never engages, because the item is not gain on the partner's disposition of an intangible, and section 17951-5 never engages, because the item is not compensation. Where the partner instead disposes of the interest itself, the Franchise Tax Board's position is that the gain attributable to section 751 property is sourced at the partnership level under Regulation 17951-4 and only the remainder is gain on an intangible analyzed under section 17952 and the business situs rule (FTB Legal Ruling 2022-02), though the Office of Tax Appeals declined to follow that ruling in an opinion posted as pending precedential in October 2026 (Appeals of J. Burch, J. Carden and K. Carden, 2026-OTA-527P), treating the whole sale as a sale of an intangible in the nonresident's hands; and where the arrangement is in substance a fee for services, the compensation rules govern. Sorting which of those things happened, and in what proportions across a fund's life, is the first analytical step rather than the last, and it is the step a mobilia-versus-compensation framing skips entirely. Valentino, cited above for the narrower proposition about what section 17952 reaches, itself relies on Regulation 17951-4, which is part of why the case is better read as marking the boundary between these frames than as a pure mobilia authority.

The three-year line: IRC section 1061 and California's express decision not to conform

Federal law supplies one bright line, though it answers a different question than the one California's sourcing rules ask. Internal Revenue Code section 1061, added by the Tax Cuts and Jobs Act (Pub. L. 115-97, section 13309(a)) for taxable years beginning after December 31, 2017, generally recharacterizes a partner's net long-term capital gain with respect to an applicable partnership interest as short-term capital gain unless the underlying asset was held for more than three years. Final Treasury regulations implementing that rule took effect for taxable years beginning on or after January 19, 2021 (T.D. 9945; Treas. Reg. sections 1.1061-1 through 1.1061-6). The recharacterization changes the federal rate that applies to the gain; it does not convert the gain into compensation, and it leaves the gain's basic character, a partner's distributive share of partnership capital gain, otherwise intact.

California's relationship to section 1061 was just settled, and it settled in the opposite direction from what the conformity headline suggests. California conforms to the Internal Revenue Code only as of a specified date fixed by statute, and that date had been frozen at January 1, 2015 since the last general update (Rev. and Tax. Code section 17024.5), which meant section 1061, enacted in December 2017, was never part of California law through ordinary conformity at all. Senate Bill 711 (Stats. 2025, ch. 231) moved the specified date to January 1, 2025, operative for taxable years beginning on or after January 1, 2025 (section 17024.5(a)(1)(Q)). But the same act drew a line through section 1061 on its way past: it added Revenue and Taxation Code section 18045, which provides that section 1061 of the Internal Revenue Code, relating to partnership interests held in connection with performance of services, shall not apply. Section 1061 therefore remains outside California law, no longer by the accident of a stale conformity date but by express exception. The exclusion makes sense on its own terms. Section 1061 is a rate provision: it converts long-term capital gain to short-term capital gain so that the federal preferential rate is denied, and California taxes capital gain at the same rates as ordinary income, so the recharacterization would have had no California rate to change.

The express decoupling sharpens the sourcing analysis rather than changing it. Nothing in section 17952 conditions mobilia treatment on whether gain is long-term or short-term; the statute sources gain on intangible property to the nonresident's residence without regard to holding period. A short-term capital gain recognized by a nondomiciliary nonresident on the sale of stock, unrelated to any services, is still gain on an intangible sourced under section 17952 to the state of residence, holding period notwithstanding. With section 18045 on the books, the federal three-year line has no California statutory operation of any kind: it does not change a California rate, and nothing in the sourcing statutes refers to it.

The Franchise Tax Board's published view

The Franchise Tax Board has published its view on this question. In the Chief Counsel Corner of its December 2020 Tax News, the department treats a carried interest as the partner's distributive share of partnership income, confirms that California does not conform to section 1061, and sources a nonresident partner's carry under Regulation 17951-4 when the carry arises from a trade or business and section 17955 does not apply. The piece draws no holding-period line. For a carry paid out as a distributive share, the Franchise Tax Board's published view applies Regulation 17951-4 whatever the holding period, and the entity-level apportionment described above, not the partner's working days, determines the California share.

That published view does not foreclose every theory an examiner could raise. Where a fund manager was a California resident through most of a fund's investment period and realized the carry only after establishing nonresidency, an examiner could still argue that part of the payout is compensation for investment management services performed in California, allocated to the state by working days under Regulation 17951-5. That is an audit theory with no published rule behind it. The citable statutes do not draw a three-year line for sourcing purposes at all; they ask, respectively, whether the intangible has a business situs in California and whether the services were performed here, and the published view answers the distributive-share case under Regulation 17951-4 without reaching either.

Practice notes

A carried interest realization tied to a recent or planned California departure calls for two separate work streams that are often collapsed into one and should not be. The first is the residency change itself: whether the facts support nonresident and nondomiciliary status on the date the gain is recognized, tested the way any California residency change is tested, against the full record of ties and conduct, not against the taxpayer's stated intent. The second, and the one this article addresses, is the sourcing analysis that only becomes relevant once residency is established: whether the carry is properly analyzed as a distributive share of an investment partnership's securities income excluded under section 17955, as a distributive share of partnership business income apportioned at the entity level under Regulation 17951-4, as gain on intangible property under mobilia, as compensation for services performed in California, or as some allocation among them tied to the services record built over the fund's investment period. A proper analysis traces the holding period of each tranche of the interest against section 1061's federal three-year measure, which still governs the federal return even though section 18045 keeps it out of California law, reconstructs where and when the underlying investment management services were performed relative to the residency change date, and builds the position and its supporting record before a return is filed, not after an audit notice arrives. Where the carry has a meaningful California services history, build the record to withstand an examiner's argument that part of the payout is compensation for California services allocated by working days, even though the Franchise Tax Board's published view sources a distributive-share carry under Regulation 17951-4. G&G State Tax Group provides residency and sourcing analysis for fund principals and carried interest holders alongside its state and local tax practice.