Leaving New York: breaking your lease and cutting your tax ties cleanly

The flight home is the easy part. The lease, the deposit, the last New York tax return and that 401(k) are what follow you back to Australia if you don't sort them before you go.

The short version

• If you leave before your lease ends, your landlord must make a good-faith effort to re-rent the flat, and your lease ends once a new tenant pays the same rent or more [1].
• Your landlord has 14 days after you move out to return your deposit or send an itemised list of deductions, or they must return the whole lot [1].
• You'll file a part-year resident New York return for the year you leave, and your income is split between your resident and non-resident periods [2].
• Most departing non-citizens need an IRS sailing permit before they leave, applied for two weeks to 30 days before departure [3].
• Cashing out a 401(k) before age 59½ generally costs an extra 10% tax on top of income tax [4]. Leaving it invested is often the better call.

Step one: getting out of the lease

Most New York leases run for 12 or 24 months, and US landlords don't love early exits. You have four options, roughly from cleanest to messiest.

Assignment and subletting rules

New York law treats buildings differently by size [1]:

• Four or more apartments: you can sublet with the landlord's advance consent. Send a written request by certified mail, return receipt requested, with the sublet details and a copy of the proposed sublease. The landlord has 30 days to answer, and silence counts as consent. If the landlord refuses unreasonably, you can sublet anyway [1].
• Assignment is stricter. The landlord must consent in writing. If they refuse unreasonably, you can be released from the lease within 30 days of your request [1].
• Three or fewer apartments: you have no right to sublet. If the landlord unreasonably refuses, your remedy is to leave the lease after 30 days' notice [1].
• Rent-stabilised flats have extra limits on subletting, generally two years in any four [1].

A sublet usually makes little sense if you're moving back to Australia. You stay on the hook for the rent, and chasing a subtenant from Brisbane is no fun.

The landlord's duty to re-rent

Leaving early doesn't mean you owe every month of the lease. Your landlord must make a good-faith effort to find a new tenant, and a lease clause can't take that duty away [1]. Once a new tenant pays the same or higher rent, your lease is treated as terminated [1].

Help them do it. Give written notice as early as you can, offer flexible viewings, take good photos and share the listing with friends. The sooner it's re-let, the less you pay.

Steps to take, in order

1. Read your lease for any early-termination or "buyout" clause, often one or two months' rent.
2. Talk to the landlord or managing agent first. Ask for a written surrender agreement.
3. Find a replacement tenant and propose an assignment, in writing.
4. Give written notice of your move-out date if neither works, and keep a copy.
5. Get every agreement in writing, signed by the landlord, before you hand back the keys.

Our guide to renting in New York covers lease types and broker fees if you're still deciding whether to sign a long lease.

Step two: getting your deposit back

New York caps deposits at one month's rent, and the return rules are clear for non-regulated flats [1]:

• The landlord must return your deposit within 14 days of you moving out [1].
• If they're keeping some for damage, they must send an itemised list within the same 14 days. Miss that deadline and they must return the full deposit [1].
• If the landlord deliberately breaks the law, you may be entitled to up to twice the deposit [1].
• You can ask for a pre-move-out inspection, and you're allowed to be there. The landlord must tell you what needs fixing so you can avoid deductions [1].

Before you leave:

1. Request the inspection in writing about two weeks before you go.
2. Fix what's listed, then clean properly.
3. Take time-stamped photos and video of every room on move-out day.
4. Give the landlord a forwarding address in Australia and ask for the refund by international wire or to a US account you're keeping.

If the deposit doesn't arrive, you can complain to the New York Attorney General's office or go to small claims court, though suing from Australia is slow. A US bank account you keep open makes the refund much easier.

Step three: your last New York tax returns

Part-year residency

In the year you leave, you're a New York State and City resident until you move. After that, you're a non-resident, and your income is split between the two periods on Form IT-203 [2]. Income you earn from New York sources after you leave, such as a bonus for work done there, can still be taxed by the state.

Prove you've really left

New York looks closely at people who say they've left, especially high earners. Your domicile doesn't change until there's clear and convincing evidence you've abandoned it and set up a new one [2]. And if you keep a permanent place of abode in New York and spend 184 days or more there, you can be taxed as a statutory resident even if your real home is elsewhere [2].

So when you go home to Australia, make it obvious:

• End the lease, or don't keep a flat available for your use
• Move your belongings, and keep the shipping paperwork
• Close or change the address on your New York driver licence or ID, voter registration and gym memberships
• Keep your flight records and a diary of days in New York
• Update your address with your employer, bank and the IRS

The sailing permit

Before most non-citizens leave the US, the IRS expects a departing alien clearance, often called a sailing permit [3]. You apply in person at an IRS office, by appointment, at least two weeks but no earlier than 30 days before you leave [3]. Form 2063 is the short version for people whose departure won't hinder tax collection; others file Form 1040-C [3]. Appointments can be scarce, so book early [3].

The permit doesn't replace your final return. You still file your federal Form 1040 by the following April, and any tax paid with the permit is credited [3].

Your final FBAR

If your Australian accounts were over US$10,000 at any point in your last US calendar year, you still owe an FBAR for that year. See our guide to federal, state and city tax in New York.

Step four: your US money

Keep one US bank account open

A US checking account is handy for the deposit refund, final pay, tax refunds and any lingering bills. Ask your bank whether it allows accounts with an overseas address; policies vary, and some banks close them. Keep online access, two-factor authentication on an app rather than a US mobile number, and a little balance to avoid fees.

The 401(k): leave, roll or cash out?

You have three broad choices:

• Leave it with your employer's plan or roll it into an IRA. It keeps growing tax-deferred in the US. Check whether the provider accepts customers living abroad.
• Cash it out. Before age 59½ you'll generally pay an additional 10% tax on top of ordinary income tax [4]. Withholding may not cover all the tax due [4].
• Move it to super. You generally can't roll a 401(k) directly into Australian super the way you can between US plans, and taking money out to contribute to super triggers US tax first.

How Australia taxes a 401(k) once you're a resident again is complex, and the treaty matters. Get advice from someone who knows both systems before you withdraw. Our guide to super while living overseas covers the Australian end.

Social Security credits

Your US Social Security contributions aren't lost. Under the US–Australia social security agreement, your US and Australian work periods can count together towards a partial US benefit once you have at least six US credits [5].

Step five: getting your stuff and yourself home

Shipping a New York flat to Australia is about the boxes and the biosecurity rules. Most Australians ship a small load by sea and fly with the rest. Our guide to shipping your belongings home and customs covers the paperwork, duty-free concessions and what Australian biosecurity will inspect.

Then work through the Australian side:

• Medicare: re-enrol with Services Australia once you're back
• ATO: tell the ATO you're an Australian tax resident again from your return date
• Super, HECS and Centrelink: update your details with each
• Pets: start early. Bringing a dog or cat from the US to Australia takes months of planning

Our moving back to Australia checklist puts all of it in order. If anything goes wrong in your final weeks, such as a lost passport, Smartraveller and the Australian Consulate-General in New York are your first contacts [6].

Before you go, post your move in Cooee USA, our Facebook group for Australians in the USA. Someone is usually looking to take over a lease, buy a couch or swap tips on the cheapest way to ship boxes to Perth.

Sources

1. Residential tenants' rights guide – New York State Attorney General
2. Determining residency status – New York State Department of Taxation and Finance
3. Departing alien clearance (sailing permit) – Internal Revenue Service
4. Topic no. 558, Additional tax on early distributions from retirement plans other than IRAs – Internal Revenue Service
5. US–Australia social security agreement – Social Security Administration
6. United States travel advice – Smartraveller

Keep reading

• Renting in New York as an Australian
• Three layers of tax in New York: federal, state and city
• Moving back to Australia checklist
• Shipping your belongings home and customs