Alex CraigBusiness Member
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
10y
Yes, that is correct. You have to pay federal income taxes on your net profits. Your expenses would be interest if you have a loan and cost associated with owning the property. Those expenses could be home office, travel to Memphis, business meals where you discuss your Memphis properties, etc. If you are a full time real estate investor, you would take the deprecation.
As for your state cost, ff you have an LLC, you will pay a $300 LLC renewal each year and probably a $100 tax to the state of TN of that LLC.
Is this what you are referring too? I just did my 2015 Federal Income taxes today. While I like the cash flow real estate brings, the $150,000 in deprecation I was able to take as a full time real estate investor is a game changer as my CPA will show me my tax payment with deprecation and no deprecation.
901-848-9028
2 Reply
Dean Letfus
Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
10y
Do you mean state income tax? No you don't. Tennessee doesn't have it!
2 Reply
Daniel HymanBusiness Member
CPA · Milwaukee, WI · Member since 2016 · 2k+ posts · 1k+ votes
10y
Johnny Khoury are you referring to rental income or income from sale of a property?
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Johnny Khoury
OP
Real Estate Agent · San Jose, CA · Member since 2014 · 41 posts · 11 votes
10y
Rental income , state income tax
1 Reply
Henry J.
Monterey Park, CA · Member since 2014 · 157 posts · 80 votes
10y
@Johnny Khoury
If you live in CA, and the property is under your personal name, you will have to pay federal and CA income tax if you have net positive rental income. TN doesn't have state income tax for personal income.
If you reside in CA, and your property is under a LLC or corporation, then other than TN state business income tax and renewal fee stated by Alex above, you will also need to pay the CA franchise tax fee...
https://www.biggerpockets.com/forums/109/topics/32...
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AJ Singh
Rental Property Investor · Orange County, CA · Member since 2016 · 512 posts · 374 votes
10y
Johnny Khoury that is correct. As long as you are a Ca resident you have pay taxes in your income from Tennessee I even pay taxes on my cash flow from india
1 Reply
Alex CraigBusiness Member
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
10y
I read this and I have to think, why does one live in California?
901-848-9028
4 Reply
Alex CraigBusiness Member
Real Estate Professional · Memphis, TN · Member since 2009 · 1k+ posts · 1k+ votes
10y
I did not mean to hit send. I love CA! In my corporate days I would go there 4 times a year and now in real estate, we get invited to speak at Real Estate events teaching investors how to get the most cash flow out of a Turnkey Property. I absolutely love visiting CA; probably my favorite state to visit. However, I would have to make 2x the income for the same lifestyle. I guess my question, what keeps people from leaving the state? Maybe it is because the Terminator was the Governor! :)
901-848-9028
0 Reply
Chris E.
Investor · FL · Member since 2015 · 202 posts · 34 votes
10y
The weather, the weather, and I think also the weather are what keep us here ...
1 Reply
Joseph S.
Investor · Pasadena, CA · Member since 2013 · 28 posts · 26 votes
10y
Here's what I understand (but take it with a grain of salt since I'm not an attorney or CPA):
Tennessee doesn’t have a state income tax so if you own your properties personally you are only subject to federal income taxes.
However, anybody really interested in real estate needs to consider protecting their finances from liability with a corporate veil. Tennessee has both an excise tax and a franchise tax. The excise tax which effectively is an income tax, is a flat 6.5% tax on net earnings from doing business in the state. The franchise tax is based on the greater of a business’s net worth or book value of real and tangible property owned or used in Tennessee with a rate of 25 cents per $100, of the business’s net worth with a minimum tax of $100. These taxes can take a HUGE chunk out of your final cash flow. An annual report must also be filed - LLCs costs no less than $300; C Corporations cost $20 (they don’t recognize S Corporations), LLPs cost no less than $250.
Many states shield LLCs, LLPs, and S Corporations from these taxes. However TN only provides such an exemption to Sole Proprietorships and General Partnerships – both of which do not have a strong corporate veil (which is the main reason why you incorporate in the first place). You can see a breakdown of how each of these entities is treated with examples here: http://www.nolo.com/legal-encyclopedia/tennessee-state-income-tax.html.
Fortunately, it appears there are a couple exemptions that can allow you to get the benefits of a corporate veil without paying the taxes. The one I am personally considering is the FONCE (family owned non-corporate entity) exemption which waives both the excise and franchise taxes if at least 95% of the entity’s ownership must be directly held by family members AND substantially all (66.67%) of the activity of the entity is either the production of passive investment income or the combination of the production of passive investment income (which includes residential rental income) and farming. See the explanation here: https://www.tn.gov/revenue/article/fae-fonce-exemption.
However, in 2009 the TN legislature amended the FONCE exemption to no longer include rent from industrial and commercial property – so if you’re into commercial real estate investment (which includes property with more than 4 units) you’re paying the full bill. See details here: http://www.wallerlaw.com/News-Events/Bulletins/24893/Tennessee-Modifies-the-FONCE-Exception-to-the-Franchise-and-Excise-Taxes-and-the-Filing-Requirements-for-Many-Other-Exemptions. It may also be worth noting that the FONCE does have some critical reporting and application instructions so be sure to review this carefully with your CPA.
All that to say, you're pretty much screwed if you're into commercial (you're either paying huge taxes as an entity or huge insurance premiums to limit liability), but have a safe out if you're invested in residential with an LLC with a FONCE exemption.
If you're investing in TN from out of state your own state may have their own fees and taxes you'll need to consider.
1 Reply
Roger Poulin
Realtor · Hermitage, TN · Member since 2014 · 125 posts · 93 votes
10y
@Joseph S. is surprisingly knowledgeable about Tennessee corporate taxes for someone in California. He is spot on.
0 Reply
AJ Singh
Rental Property Investor · Orange County, CA · Member since 2016 · 512 posts · 374 votes
10y
Alex Craig weather overrides a lot of unfriendly business climate in ca. Labor costs are slowly rising every year in Los Angeles. Would love to move to Germantown
1 Reply
Alexander Price
Investor · Gilroy, CA · Member since 2016 · 255 posts · 195 votes
10y
@Alex Craig
Also we live in CA because of the high wages. Because of my frugal lifestyle I can support my family of 4 while living in the South Bay on a single income and still invest. However, when it comes to taxes, CA can suck an egg. They always want more money, even if nothing related to their municipalities earned it, in this case rental income from TN.
1 Reply
Isabeaux N.
McMinnville, TN · Member since 2016 · 3 posts · 1 vote
10y
Hi @Joseph S. and @Roger Poulin.
Roger, one can live anywhere in the world and be spot on about taxes where they invest in ... it is called the Internet and research. {grin} Glad you are amazed. BTW- I am a CA girl in TN cause CA is too expensive for me at this time. Someday I want to go back to my home state again, cause all my family is there, even though I love the TN countryside (just do not like how factories treat their employees and the lack of good Labor laws in TN - "I am Norma Rea" hear me roar)
Joseph, so far you have talked about having a TN Corp. Have you done any research on having a NV Corp, preferably an LLC, while doing business in TN? The corporate veil in NV is much stronger than in TN or any other state, based on what I know about NV corps. I am thinking of getting a NV LLC with a "Certificate of Authority" to work in TN. I think paying the extra taxes for the right to do business in TN with a NV corp may be worth it. Do you have any favorite web sites you get tax and corp information you are willing to pass on (in addition to the FONCE sites you posted)? I have not started doing any RE investing yet, I am still in the learning stage, and would appreciate all the information I can.
Thanks!
Izzzy
1 Reply
Joseph S.
Investor · Pasadena, CA · Member since 2013 · 28 posts · 26 votes
10y
@Roger Poulin Thanks for the confirmation - happy to help!
@Isabeaux N. I don't really have a compendium of sources I can point you to other than to say that in our digital age just about everything is only a quick google search away.
Here are my thoughts (again, take these with a grain of salt - I'm not an attorney or CPA):
Knowing that being incorporated out of state doesn’t reduce your tax liability and creates extra paperwork and fees, I don’t know that it’s worth it. However, from what I understand the best states to incorporate in are Nevada, Wyoming, Delaware, and South Dakota.
Nevada is fast. Almost every filing can be done online with results in minutes. Nevada has very strong asset protection law, creditor protection and liability protection for its owners, but it now has an updated Commerce Tax return for LLCs and while there aren’t any costs for those not doing business in NV, you still have to take the time to file it.
Wyoming is cheap, has no state income tax, good strong laws, and privacy, but they are also slow, don’t have expedited filing options, and require original ink on their paperwork.
Delaware has perhaps the strongest corporate veil protection laws and the only state with a Chancery Court. But like Wyoming, it also doesn’t have an online filing option.
South Dakota has good laws and no income tax (personal or corporate), and relatively low incorporation and maintenance fees.
Since TN law does hold a presumption that a business entity is a distinct legal entity and has a fairly consistent practice for determining when to pierce the veil - Federal Deposit Ins. Corp. v. Allen, 584 F.Supp. 386, 397 (E.D. Tenn. 1984) – if I lived in the state I’d probably incorporate there to avoid the extra costs and paperwork. However, I can understand why somebody would choose to incorporate in the Big 4 for peace of mind.
1 Reply
James WachobBusiness Member
Real Estate Broker · Memphis, TN · Member since 2015 · 1k+ posts · 887 votes
10y
I can see why people live in CA. It's 6:20am and raining in Memphis. That 24/7 sunshine doesn't come cheap!
@AJ Singh would it benefit to have a TN LLC?
My tax guy is a big RE investor in town... I'd be happy to share his contact info if anyone is interested.
Jw
1 Reply
Isabeaux N.
McMinnville, TN · Member since 2016 · 3 posts · 1 vote
10y
@Joseph S.
Thanks, Joseph. Good to know. It has been 15 years since I had a NV Corp. Guess I need to brush up on these new corp laws.
0 Reply
AJ Singh
Rental Property Investor · Orange County, CA · Member since 2016 · 512 posts · 374 votes
10y
James Wachob Pls share contact of your tax guy. I would appreciate that. 24/7 sunshine is all good but gets boring after a while without four seasons. Unless one is in water sports and activities
1 Reply
Jerry W.Pro Member
Moderator
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
10y
@Joseph S., actually Wyoming now does have online filing if you use a credit card. The same with filing the annual reports. I agree that usually the state you are going to do business in is the best as you are supposed to register in any state you do business in as a foreign LLC.
1 Reply
Joseph S.
Investor · Pasadena, CA · Member since 2013 · 28 posts · 26 votes
10y
@Jerry W.
Ah, progress! Thanks for the heads up!
0 Reply
Johnny Khoury
OP
Real Estate Agent · San Jose, CA · Member since 2014 · 41 posts · 11 votes
10y
Thank you all for your response,
I guess I do not owe any state tax then :) good news...
As for living in California , NOT for long... I am trying to move away from the state , everything here is expensive. Thank good for the good Computer Jobs ..
all I need is 10 more homes then I am retiring :)
0 Reply
Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
10y
@Account Closed there are too many reasons to list why people want to live in CA.
Beach's, mountains, deserts, wine country, professional and college sports galore and of course the weather.. But CA is a big place the weather in far northern CA is nothing like LA which is probably were you go on your business trips most of the time.
There is NO state as diverse when it comes to natural wonders and beauty.. think Big Sur, Yosemite, lake Tahoe , Beach's of Socal , the awesome redwood forests of the far north tree's that were growing when Christ walked the earth.. there simply is no state like CA...
then you take the chance to hit it big in the income side of things.. and if you invested correctly over the years you can be a multi millionaire on appreciation alone no need for cash flow. I know it treated me well over the years.
I am in Oregon now and its OK here but nothing like CA in my mind.. I will take the 800 a year franchise tax fee as the cost of doing business and living in such a dynamic state.
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AJ Singh
Rental Property Investor · Orange County, CA · Member since 2016 · 512 posts · 374 votes
10y
John Anderson Your info is correct. No spending on infrastructure. Govt deep in debt to retirement benefits unfortunately
0 Reply
John P.
Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes
10y
Two thoughts:
1) an LLC does not give absolute liability protection last I checked. So a person who is injured on your property could sue your LLC for any properties in the LLC. It seems a large umbrella policy makes more sense.
2) we have not had any rain since May. Literally not even a drop that I can recall and that is most years. Late May through late September is bone dry. I for one like it like that. It's well worth a few extra bucks in tax.
0 Reply
Dean Letfus
Specialist · Memphis, TN · Member since 2012 · 1k+ posts · 1k+ votes
10y
"would it benefit to have a TN LLC?"
Arizona is better, cheaper to run.
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