Musk's plan to sell shares and move to Texas has been brewing for a long time.

As early as May 2020, Tesla, Inc. CEO Musk announced on Twitter, "I am selling almost all my physical property and will no longer own any real estate." "the property is a little heavy," he said on a podcast a few days later. " Then seven properties in California are listed. In December, Musk announced that he had moved from California to Texas. His charitable foundation is not far behind, and soon after, Tesla, Inc. will move out.

At first, these actions seemed to be the impulse of billionaires to wander around the world, or dissatisfaction with the restrictions on the epidemic in California.But now it looks more and more like Musk's shrewd expectations of the coming big tax bill.

California has the heaviest taxes in the United States

Heavy taxes are one of the most important reasons why Musk moved out of California.

California is the most powerful state in the United States, and the famous "Silicon Valley" is in California, gathering a large number of large technology and Internet companies such as Alphabet Inc-CL C, Facebook Inc, Apple Inc, Cisco Systems, Qualcomm Inc, PayPal Holdings Inc, LinkedIn, NVIDIA Corp, eBay and Intel Corp, making California the state with the largest number of Fortune 500 in the world and the state with the largest number of people on the US rich list.

But at the same time, California has the heaviest taxes in the United States.

California's corporate tax is 8.85%, compared with Texas's 0.75% franchise tax on operating margins.

Seven states in the United States, including Texas, are exempt from personal income tax, while California levies the highest tax rate of 13.3%.

In addition, Texas does not levy capital gains tax, while in California, Musk applies a capital gains tax rate as high as 23.8%.

Musk's "fancy" tax avoidance

No wonder Musk is trying to avoid taxes with such a high tax rate. Musk currently has a fortune of $296 billion, according to the Bloomberg Billionaires Index.He has achieved low taxes for years by mortgaging his Tesla, Inc. shares rather than selling them.

Several investment banks have lent him $515 million, according to a regulatory filing in December 2020. The number of shares he mortgaged means he may have borrowed billions of dollars.

Bloomberg quoted Daren Shaver, a senior lawyer at the San Francisco law firm Hanson Bridgett, as saying:

This is a very shrewd plan, because you can always borrow money, and if you use the right method, you can withdraw the value that you do not have to pay tax. Although there is interest on it, it is cheaper than the tax rate.

At the same time, Wall Street mentioned earlier that Musk would face an option tax bill of more than $15 billion in the coming months, prompting Musk to sell shares sharply.

In the past month, Musk has sold nearly $10 billion of Tesla, Inc. shares. Earlier, on Nov. 7, he posted an unusual Twitter vote asking whether he should sell some of his shares in Tesla, Inc..

Musk has sold about 9.2 million shares worth $9.85 billion since the Twitter vote. The most recent sell-off (Nov. 23) was Musk's fourth exercise of the stock option package in his 2012 compensation package. After the share sale on the 23rd, Musk sold Tesla, Inc. shares accounting for 53.8% of the shares he promised to sell (17 million shares), that is, the sale process is more than halfway through.

However, while avoiding a huge option tax, Musk faces a huge California capital gains tax.

Although some of the shares sold were the result of exercising options and had no capital gains, he also sold about 5.4 million shares he already owned.

Since Tesla, Inc. 's share price has risen more than 1500 per cent in the past two years, and even more since the company was founded in 2003, it means that Mr Musk's sale price of the 5.4 million shares will face a capital gains tax of 23.8 per cent.

According to Bloomberg calculations, at least $1.35 billion will be taxed on the $5.8 billion of shares sold so far.If Mr Musk sells all 10 per cent of his shares, excluding options, the amount of tax payable could rise to about $4.35 billion, based on Tesla, Inc. 's current share price.

In addition, if Musk had not left California, his bill would have added another 13.3% personal income tax, which would have reached $2.4 billion.

So, in order to avoid taxes, Musk has been selling California real estate intensively since last year, including luxury estates in the Bay area, mansions in the Belle area, and ranch villas once owned by Gene Wilder (the late famous movie star). To enable him to announce that he is no longer a California resident.

Real estate records show that Musk himself provided personal loans to buyers of at least five homes, which facilitated the completion of the deal.

According to Bloomberg's calculations,So far, moving out of California may have saved Musk, 50, more than $500 million in capital gains tax. And by the time he fully sells the 10% stake in Tesla, Inc. he announced on Twitter, he can deduct more than $2 billion from his tax bill just by moving.

It is not easy to avoid taxes completely

However, it is not easy to avoid California taxes altogether.Musk needs enough time not to live in California to avoid problems with the state government.

At present, the state government is assessing Musk's actual place of residence and the amount of tax payable on these transactions, these procedures are very complicated.

A key issue is the time gap between the official relocation date and the occurrence of large transactions. The Inland Revenue Service generally advises taxpayers to wait six months to a year before trading, otherwise they may face an audit by California auditors.

Meanwhile, Democrats in Congress are urging higher federal tax rates for the super-rich.If Mr Musk waits until August, when the option expires, he could incur extra taxes from the Democrats' latest version of the "better Reconstruction" bill. The legislation, approved by the House of Representatives on November 19th, would impose a new 8 per cent surtax on income of more than $25 million.

For now, Musk has been building an empire in tax-friendly Texas. The billionaire seems to have stuck to his earlier Twitter manifesto, saying he lives in a $50,000 rental house.