Midland, TX · Member since 2019 · 111 posts · 25 votes
Hi all,
I am sure there are some tax experts on here or at least people with more knowledge or experience in this that may have advice. I am debating whether it is better to invest in Rentals in my home state of Texas or go out of state. The prices of SFHs have gone up substantially in Texas over the last 7 years, and along with that so have our property taxes. This has me looking into some other markets to start investing in SFRs.
My question really relates to how it affects my taxes, etc. Would I be better off keeping my money in Texas and paying the higher property tax which is a deduction against the property on returns. Or am I better off looking out of state at more affordable properties with lower property taxes, but that state would have income tax?
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
7y
While taxes can't be ignored, I wouldn't let taxes drive your decision making. The economics should always come first.
I have properties in CA where I live and have added properties in OH primarily because of the pricing economics, but secondarily because any tax I pay in OH is credited against my CA tax in full so no net additional tax.
If Texas has no income tax then presumably any income tax paid out of state would be an additional cost, in addition to any real estate taxes paid which should at least be deductible where ever paid.
You should also realize prices have risen everywhere (even in OH where I personally can no longer find attractive pricing). CA has been out of site for years now, and I am unaware of any locations where prices are really "cheap".
Plus if you go out of state you need to have boots on the ground where ever you go to ensure things run as planned. I had lived in OH before moving to CA, so I already had a team there in place (RE agent, PM, insurance guy, relatives in case of emergency, etc.).
Investor · brentwood, CA · Member since 2016 · 1k+ posts · 730 votes
7y
While taxes can't be ignored, I wouldn't let taxes drive your decision making. The economics should always come first.
I have properties in CA where I live and have added properties in OH primarily because of the pricing economics, but secondarily because any tax I pay in OH is credited against my CA tax in full so no net additional tax.
If Texas has no income tax then presumably any income tax paid out of state would be an additional cost, in addition to any real estate taxes paid which should at least be deductible where ever paid.
You should also realize prices have risen everywhere (even in OH where I personally can no longer find attractive pricing). CA has been out of site for years now, and I am unaware of any locations where prices are really "cheap".
Plus if you go out of state you need to have boots on the ground where ever you go to ensure things run as planned. I had lived in OH before moving to CA, so I already had a team there in place (RE agent, PM, insurance guy, relatives in case of emergency, etc.).
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Amber Saulsbury
I'd focus on finding deals instead of all the taxes on the back end because you never know what will happen down the road. Maybe they will get rid of the 10k salt tax, maybe they won't.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Amber Saulsbury if done correctly, you shouldn't be paying any income tax on rentals. The expenses and depreciation should end up as a near zero taxable income.
I would go wherever there is more money to be made
Midland, TX · Member since 2019 · 111 posts · 25 votes
7y
@Jason D.
Thank you!! I would think no income tax on rentals even with depreciation, etc would mean that I was leveraging right, or had some sort of loan on the property? Otherwise if it’s paid for I wouldn’t see there being enough expenses or depreciation to wipe out the income right? Or am I missing other things?
Midland, TX · Member since 2019 · 111 posts · 25 votes
7y
@Jason D.
That seems to be the advice of everyone on here, I guess I have a hard time with debt if it’s not a must. I’m going to have to research more. I guess everyone is counting on the appreciation for that to make sense right. Because otherwise if you can pay cash say, and your making 8-10 percent on a property just for an example. But your paying a bank 4.5 percent, aren’t you just eating up your profits. Sorry, I know that’s probably a stupid question and everyone on here seems to leverage, but if your going to buy and hold, the only benefit to leverage is to purchase more and count on appreciation, or Am I missing something?
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Amber Saulsbury it's two different strategies.
Paying cash is (obviously) a slower approach, which is the main reason that you see most people here against it. Everyone want to get rich quick.
Paying cash is low risk, and with low risk comes low reward. With leverage, you are maximizing every dollar invested, and making maximum return.
Think of the extremes.... if you pay $100k cash, and your cashflow is $500/mo. It takes you 16 years before you make your first dollar. Every dollar of cash up to that point is just paying you back the $100k.
If you finance 100% of the cost ($0) invested, you are making money from day 1.
Somewhere in between is where most people end up but that's the gist of it.
Midland, TX · Member since 2019 · 111 posts · 25 votes
7y
@Jason D.
Jason, thank you!! That makes sense, I hadn’t thought about the regaining my initial investment before counting a real profit. Appreciate it, rookie here! That’s why I love that I found BP, people are kind enough to answer my dumb questions. Thanks so much!
Midland, TX · Member since 2019 · 111 posts · 25 votes
7y
@Bill Crow
Yes sir, that makes sense, I guess it’s just a little harder to cash flow at times with the higher property tax. Do you keep your investments in state?
That seems to be the advice of everyone on here, I guess I have a hard time with debt if it’s not a must. I’m going to have to research more. I guess everyone is counting on the appreciation for that to make sense right. Because otherwise if you can pay cash say, and your making 8-10 percent on a property just for an example. But your paying a bank 4.5 percent, aren’t you just eating up your profits. Sorry, I know that’s probably a stupid question and everyone on here seems to leverage, but if your going to buy and hold, the only benefit to leverage is to purchase more and count on appreciation, or Am I missing something?
It most definitely is NOT the advice of everyone on here. Some of us do not use leverage in our RE investing.
There are good reasons for using either cash or leverage, but tax savings is never a good reason to use leverage. If you are in the 24% tax bracket, then for every $100 in interest you pay the mortgage holder, you save $24 in taxes. NOT a smart move!
Tax savings can be considered a benefit of leverage, but never a reason for using it.
Midland, TX · Member since 2019 · 111 posts · 25 votes
7y
@Sylvia B.
Thank you!!! It’s good to hear an opinion on not leveraging. Because I think it is a safer bet for me possibly. At least to get going at first then if things are going great I could always leverage in the future to expand. But for now I do think cash is safer for me. Thanks for your input!
I use self directed Roth IRAs to beat the income taxes all together. Property tax is hard to get away from. You can leverage it or own it outright -your choice. The Roth provides tax free income for my life and my heirs lives. It seems to good to be true for the last 20 years. It works in every state as well.
Your correct pay the tax once. The property bought by my Roth IRA provides tax free rent every month/year. I paid the tax on the seeds years ago and am now reaping the crops tax free. Move from forever taxed to never taxed was my strategy. Obviously you can also use a traditional Ira but you will pay tax when withdrawn.
@Carl Fischer so you pay all the taxes upfront? Sorry, I am completely new to this and trying to find the smartest way to go about income taxes. Thank you!