Investing in too many different states?

Question

Does anyone have any recommendations in the number of different states one should invest in?  I know someone who has a "property in this state and a property in that state" and he doesn't mind because "the numbers make sense."  This seems onerous and could be burdensome at tax time.  Thoughts?

David Krulac · Answer

You can't invest in more than 50 states, unless some new states are added.  For tax purposes you only file one Federal return and in most states you would file your tax return in your home state for all income generated in every state.  There may be some exceptions to that.  But I've owned property in 7 or 8 states and never had to file a tax return in more than 1 state, the state of your primary residence.

Now if you want to file as being a resident of say a state with no income tax like FL, TX or4 or 5 others, then you have to be a permanent resident there, live there more than 6 months a year and probably vote there, get a drivers license there, have license plates for your cars there, receive mail there, pay utilities there, etc, etc, etc.

Stephen Chittenden · Answer

I have bad news for you.  Unless you only own property in states without a state income tax, you might want to check with a better accountant.  You typically should be filing nonresident returns reporting rental property income for states in which you own property but do not live.  There can also be exceptions if the states have entered into reciprocal agreements (usually with neighboring states), though those don't always cover rental income.

Account Closed · Answer

Also be aware that many states require a partnership or LLC to withhold tax for non-resident members / partners.

Tina Jenkins · Answer

Hi Ali I'm Tina I'm just starting out looking to invest in apartments

Ali Boone · Answer

There's no big issue in how many states you own, it just adds some paperwork to your taxes, yes. But if you have an accountant handling it anyways, no biggie. Not an extra charge at least.

If anything, just having to deal with multiple managers can become a pain. But if you have good managers handling your properties, it's totally fine and doesn't make a difference.

Owning in multiple areas can certainly be lucrative and great for diversification!

Stephen Chittenden · Answer

I don't know about Colorado, but that is not generally correct.  States almost always tax residents on their worldwide income.  They usually provide a credit against the state tax for the tax you paid to another state.  Accordingly, if you have rental income in a state that has a lower tax rate than your home state, you will pay tax to your home state on the income based on the difference between the rates.  If your home state has a lower rate, you'll only pay tax in the other state (but see Wynne v. Comptroller of Maryland, currently awaiting decision at the U.S. Supreme Court).  I do know that some states do not tax resident's income reported on Schedule E from out-of-state activities (such as Michigan).  In that case, you usually cannot take an out of state rental loss because the income isn't taxable either.  Colorado may be the same, I don't know.  Maryland taxes income from out-of-state rentals, so the loss can be taken as well.  (Note that this is a different question than whether a non-resident is subject to tax in a state in which they own rental property.)  As always, this is just general information and not advice, and everyone should consult a tax professional for information specific to their situation.

Linda Weygant · Answer

I've bolded the correct line above and agree with this.  Also, you may be doing yourself a disservice.  I have a client who was filing only a Colorado tax return and had rental property in Texas.  He did not need to be paying Colorado income tax on income generated in Texas.  If your property is running at a tax loss, the state that isn't involved may not appreciate you lowering your taxable income and may come asking for some taxes and penalties later.

Curt Davis · Answer

@Peter J.

When are you going to upload a pic for your profile? I think this question is better suited for an investor who owns in multiple states are a CPA who would also know.

Investing in too many different states?

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