Out of State Tax Considerations

7 Replies

Hi,

Over time, I've browsed so many forum topics and now I'm thinking about investing out-of-state.  I thought I remembered reading some advice about income tax vs some other tax in both your residence state and the state  you want to invest in.  I think the person used this to say that someone in California is better off investing in Texas than in New York (based off this one consideration).

Can someone refresh me on what this tax consideration was?

Also, are there any other state-specific things to consider when choosing an area to invest in?  I live in California.

Thanks!

A state that doesn't have income tax more likely than not has higher property taxes. If you're unlucky you have high property taxes and income taxes. 

But CA investing in Texas.... you're going to pay A LOT in taxes. 

Ah shoot, guess I remembered wrong about Texas being good from CA.  

Could you go into more detail about why someone in CA investing in Texas would have to pay a lot in taxes?

I'm in CA and all of my properties are out-of-state. I'm not aware of the tax specifics. My accountants deal with everything, but I've not heard of taxes being a determiner in which market you invest in. The only time I've heard of it coming into play is if the property taxes are so high in some state or market that it messes up the cash flow. But for tax considerations, ultimately rental income should eventually pan out to be tax-free income once all the write-offs and such come into play.

As far as other considerations, there are quite a few. Check this article out-

https://www.biggerpockets.com/renewsblog/2014/02/2...

Those are different things to think about. 

The closest thing related to the taxes is whether a state is landlord- or tenant- friendly. Can't remember if that's in the article or not.

@Erin W.
From a tax perspective - As a California resident - you are taxed on "worldwide income" meaning you have to report every income you earned to CA and pay tax on it.
This can include W-2 wages earned through your employer, real estate investments in CA and even real estate investments out of state such as Texas.

Normally - to offset the potential double taxation - California will give you a credit for taxes paid to another state. However, in this case, Texas does not have an income tax. Therefore; California does not have to give you a credit.

Let's look at an example of two people investing in real estate in Texas; A california resident and a texas resident

rental income of $10,000

Both will pay federal tax on the $10,000
California resident will pay state income tax on the $10,000
Texas resident will not pay state income tax on the $10,000

with that said - as a california resident - you will pay taxes on all income earned everywhere(regardless of what state)- so just compare investment on a case by case basis.

I'm no expert, but correct me if I'm wrong. I think that you can make an LLC and give the physical address as a UPS P.O. Box, as it's considered a physical address. The LLC has to be registered in Texas and should have it's own bank account. You can draw money from that account. As the property is not in your name, and the rent isn't coming in your name, AND the LLC is completely based in Texas so the income isn't taxable. If you think that you would have problem at scoring finance, you can get it in your name and then give it to the LLC. I'm no lawyer, nor an expert. I would suggest that you discuss this with someone who knows the law. I'm just telling the stuff that I have seen happening and off you want, I can ask them specifically how they did that and what tax shields do they have...

taxes don't per say make something good or bad but they are key part of how your investment performs. I'm making numbers up but if you had 2 houses say both 100k and one was 1% per year and the other was 5% per year... then it'd cost you more to operate the 5%. 

There's a lot more that goes into it than that... something to consider when picking a market but not a deal breaker by its self.

Originally posted by @Jaudat S. :
I'm no expert, but correct me if I'm wrong. I think that you can make an LLC and give the physical address as a UPS P.O. Box, as it's considered a physical address. The LLC has to be registered in Texas and should have it's own bank account. You can draw money from that account. As the property is not in your name, and the rent isn't coming in your name, AND the LLC is completely based in Texas so the income isn't taxable. If you think that you would have problem at scoring finance, you can get it in your name and then give it to the LLC. I'm no lawyer, nor an expert. I would suggest that you discuss this with someone who knows the law. I'm just telling the stuff that I have seen happening and off you want, I can ask them specifically how they did that and what tax shields do they have...

 Won't work in CA that'll cost you an extra 800 yr min (on top of whatever you're paying elsewhere).

https://www.biggerpockets.com/forums/51/topics/204984-forming-an-llc-out-of-state-living-in-california

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