taxes and the out of state investor?

4 Replies

I live in the area and have been investing  here for about 12 years now. My mother, who is retired is considering purchasing a property in Philly and paying me to manage it for her. She's looking for modest cash return as a substitute for the stock market which she's sick of.  She'd also like to see some appreciation if possible!

After looking into it a bit it looks like the tax repercussions on capital gains for an out of state investor when she sells in the end are so negative it might be prohibitive. Can anyone share some experience with this? Here's one article I read on the subject but I'm interesting in hearing more. 

https://www.washingtonpost.com/realestate/readers-plan-to-sell-investment-property-has-major-tax-implications/2014/04/09/37b80e6e-bf2b-11e3-bcec-b71ee10e9bc3_story.html

@Carla Krash Yes, the cash return you can possibly achieve through real estate is very enticing indeed!  Hopefully, the possible "negative" aspects of selling  real estate and out of state can be further clarified to not deter you.

I don't think selling the property while being out of state is that big of a deal or potential problem personally, people do it all the time. The only thing to be aware of is of any state specific tax laws in regards to real estate investing. For example, the article you linked to they were selling a property in Pennsylvania and lived in Maryland. I believe Maryland has a unique law where if you set up an LLC to own a property in Maryland, you need to file an LLC tax return every year regardless if you have bought any properties with it or any other investing related activity.

Unfortunately, most investors will have to pay taxes on real estate at some point in their investing careers. If you ever hear or read of investors saying they are not "paying" taxes, what they usually mean is that they are deferring their tax payments to Uncle Sam until some point in the future (via a transaction called a 1031 exchange). 

But, if you are not a tax professional I'm going to assume you will be using a CPA for your personal return including your real estate investing activity. You would just have to make sure they have the experience and technical knowledge of any of those nuances per the state she would be selling it from. In regards, the depreciation recapture and the capital gains tax, that is something that you mostly likely would have to pay if you were to sell after x number of years holding the property and wanting to keep the gains to pay off your own mortgage. Now as a caveat it all depends on the person's tax situation and you should definitely consult with a tax professional (CPA) to discuss your options and how to best accomplish what you are trying to do. 

@Carla Krash , also almost everything mentioned in that article had to do with Federal income taxes that you'd be subject to whether you were an out of state investor or an in state investor. Is your mom planning to hold the investment and pass it to her heirs or does she ultimately want to sell it? If she's planning to hold it forever her heirs would get a step up in their cost basis so there wouldn't be a gain to incur. 

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