Buying investment properties outside of your state - tax impact?

2 Replies

Hello, I am a single mom, have my real estate license and I am trying to build my own portfolio, buying income property in California is difficult to do with the cost of homes and the cap rates are awful. So I am looking to buy out side, have looked at AZ, i like the location but the income taxes will get me in that state, it appears that i would be double taxed for the state i live in (Ca and AZ) anyone have any insight for what states would not have that kind of impact? HELP trying to make a decision and i feel like I've got the case of paralysis by analysis and cant find a good state to do this in. 

@Kim Thrailkill

In your example

California will require you to file a California resident tax return where you report worldwide income(including the rental income in Arizona).

Arizona may require you to file an arizona non-resident tax return where you report the rental income on property located in Arizona.

While you are reporting the income on both returns, California will provide you a credit for taxes paid to Arizona, which eliminates double-taxation.

Ultimately, California has a higher state income tax than Arizona which means ultimately, you are going to pay taxes to California when you have positive rental income.

The great thing about rental properties is that you can potentially have a tax loss while having positive cash-flow. So your federal/state income taxes won't go up as a result.

Well said by Mr. Siddiqi.

You would want to focus your search for properties to those bringing you the most cash flow so you can offset those losses from taxes. Or consider finding a RE partner and maybe forming an LLC in Arizona or another state that you're looking at.

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