How does California source carried interest when a partner changes residency?
Edvin Givargis Published 12 minute read
The short answer
A capital gain recognized by a nonresident who is also a nondomiciliary generally follows the doctrine of mobilia sequuntur personam and is sourced to the state of residence, not to California, under Revenue and Taxation Code section 17952. Carried interest complicates that rule because the gain is received in connection with investment management services, and services physically performed in California remain California-source income under section 17951 regardless of where the partner lives when the money actually arrives. Neither statute turns on how long the interest was held. Internal Revenue Code section 1061 recharacterizes a partner's share of gain on an applicable partnership interest held three years or less from long-term to short-term for federal rate purposes, but California has expressly declined to adopt it: the 2025 conformity act that moved the state's general conformity date to January 1, 2025 also added Revenue and Taxation Code section 18045, which provides that section 1061 shall not apply. Nothing in section 17952's text ties mobilia treatment to how long the interest sat on the books, and no California statute borrows the federal three-year line. An informal, unpublished position attributed to Franchise Tax Board legal staff would bridge that gap by treating gain on a carry held three years or more as capital gain sourced to residence and gain on a carry held less than three years as compensation, allocated to California by working days. That position has never appeared in any published Franchise Tax Board pronouncement, is not citable, and carries no more than persuasive weight; the citable law leaves the under-three-year case genuinely open.
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 actually lives, the common law expression of which is mobilia sequuntur personam, movables follow the person. A California case applying section 17952 has limited its reach to gain on the intangible itself, distinguishing it from income that is properly characterized by the underlying business activity that produced it rather than by ownership of the asset (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 exactly 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. 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.
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 exactly 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 actually 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, full stop, 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 plainly 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 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: section 61 of the bill 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. It survives in the California conversation for one reason only, which is that the informal position described below borrowed it. That second move, from short-term capital gain to wage-like income, is not compelled by section 1061, by section 17952, or by section 17951. It is a separate administrative judgment about how to characterize carried interest for state sourcing, and it is precisely the judgment the informal position described below purports to make.
An informal, unpublished FTB position, and why it is not the last word
An informal and unpublished position, obtained directly from Franchise Tax Board legal staff and never issued in any Franchise Tax Board publication, Legal Ruling, notice, or other pronouncement, would resolve the gap by holding period: a carried interest held three years or more is treated as long-term capital gain and sourced to the partner's state of residence under the mobilia doctrine; a carried interest held less than three years is treated the same as wages and allocated to California based on the number of working days spent in the state during the period the interest was earned. The position borrows section 1061's three-year line but repurposes it, using a rule Congress wrote to set a federal tax rate as the trigger for a state sourcing recharacterization Congress never addressed.
That position is discussed here because it is useful to know it exists and useful to understand the reasoning behind it; it is not discussed as law. It has no precedential weight, cannot be cited to the Franchise Tax Board, an appeals division, or the Office of Tax Appeals, and is not attributable to any named individual. It reflects, at most, an informal staff view as of the year it was obtained, has not been confirmed or reissued since, and predates the 2025 conformity change described above by roughly six years, a period in which the underlying federal-conformity landscape it assumed has itself moved. Treating it as anything more than a data point about how an examiner might approach the question, useful for risk assessment and for anticipating an audit theory, would overstate what it is. The citable statutes do not draw a three-year line for sourcing purposes at all; they ask, respectively, whether the property has a business situs and whether the services were performed in California. A carry held two years presents a genuinely unresolved sourcing question under the statutes, whatever an informal staff conversation might suggest about how the position would likely be argued administratively.
A short illustration frames the stakes without pretending to resolve them. A fund manager who is a California resident throughout most of a fund's investment period, then relocates and establishes nonresidency and nondomiciliary status before a carried interest realization event, has a gain that plausibly reflects services performed almost entirely in California, paid out after the move. If the position above is applied, a holding period under three years would treat a meaningful share of that gain as California-source compensation notwithstanding the residency change, allocated by the working days spent in California during the earn-out period; a holding period of three years or more would treat the same gain as sourced entirely to the new state of residence. The distance between those two outcomes, for a single fact pattern, is the entire measure of why this question belongs in a technical file rather than a rule of thumb.
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 gain on intangible property under mobilia, as compensation for services performed in California, or as some allocation between the two tied to the services record built over the fund's investment period. A proper engagement 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 actually 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 fact pattern falls in the gap the statutes leave open, particularly a carry held under three years with a meaningful California services history, the analysis should be built to withstand exactly the kind of working-days allocation theory the informal position above describes, whether or not that theory is ever formally advanced, because an examiner does not need a published rule to argue one.
This article states the law as of September 19, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.