- Elon Musk's planned sale of 10% of his Tesla shares is triggering a massive tax liability.
- In moving to Texas, Insider calculates that he could carve $2.5 billion off the final bill.
- Estimates by Bloomberg show Musk has likely managed to save $500 million so far.
Elon Musk has made no secret of his desire to get out of California.
"Will own no house," he tweeted on May 1, 2020, before embarking on a selling spree to rid himself of several mansions in the Golden State. His destination: a $50,000 pre-fab tiny home in Texas. Earlier this year, he also moved his company Tesla from the west coast to the Lone Star state.
He has even lent money to at least five buyers who used the funds to purchase his properties in the state from him, according to property records viewed by Bloomberg.
One likely reason for the urgency is a looming tax liability following the sale of 10% of his Tesla shares – a move that he appeared to put to a vote on Twitter, but in reality had previously committed to in an SEC filing.
In financial and tax accounting, everything revolves around timing, and Musk needs to show that he has sufficiently exited California to avoid incurring a massive bill from the state on the capital gains from his Tesla stock.
Musk notably does not take a salary for his work for Tesla, instead taking out loans against his roughly $300 billion fortune to live off of and avoid paying income tax. This year's stock sales are widely believed to be necessary to pay off some of those loans and take advantage of certain stock options that will expire next year.
Most of Musk's current shares are subject to a 23.8% tax by the IRS on the amount of the value they increased since he obtained them, which is nearly the full current value given the stock's extraordinary rise in recent years.
Ordinarily, California would charge an additional 13.3%, but Musk can avoid this if he completes his move in time. In order to be exempt from taxation under California tax board rules, Musk must show that he will "remain in the new locality permanently or indefinitely."
According to an August SEC filing from Tesla, Musk owns about 170 million shares of the electric automaker. Selling 10% of his hoard — about 17 million shares — at the company's stock price of about $1,130 a share as of midmorning Tuesday would produce a windfall in the neighborhood of $19.2 billion. California's 13.3% cut, then, would be around $2.5 billion.
Texas has no income tax or capital gains tax on individuals. So far, Bloomberg estimates, the strategy has likely saved him about $500 million.
Cristobal Young, a sociology professor at Cornell University who studies taxes on the rich, told Bloomberg that it won't matter that nearly all the gains occurred while Musk was a California resident — all that matters is when the stock sales are recorded.
Musk is "basically shirking his tax responsibilities," Young said. "California provided access to the talent he needed to build the company."
"That's a complex analysis," tax attorney Christopher Manes told Bloomberg. "If he's claiming he's a nonresident, obviously California has an incentive to audit him and find out."
Musk did not respond to Insider's request for comment on this story.