Investing in high prop tax state without the income tax benefits?

Question

I currently am living in CA and just cashed out my investment property and am looking for a new market to invest in. My goal is to start buying and holding a portfolio of cash flowing properties through BRRRR method to help leverage my funds to there max potential. I have 200k to deploy but have been having a tough time narrowing down my search. I like a lot of the economic indicators: jobs, population growth, appreciation potential in Texas but I'm a touch weary about the high property tax rates while I'm unable to take advantage of no state income tax. I know if the numbers still work out to meet my criteria its just another line item. But I'm also considering making it a rule of thumb to stay out of the Lone Star State? Also with the potential passing of the Property Tax Reform and Relief Act of 2019, authored by Bettencourt (R-Houston) this could be less of a concern. Any thoughts on investing in Texas from out of state would be much appreciated!

Read more at: https://www.bisnow.com/houston/news/property-management/commercial-property-owners-need-tax-relief-just-like-homeowners-98929?utm_source=CopyShare&utm_medium=Browser

Alan Grobmeier · Answer

@Loren Neufeld, unless you LEAVE Cali, you won't be able to avoid Cali's punishing state taxes.  Well, you kinda can.  But you will need a CPA and a super strategic plan.  And this is the voice of experience talking.

From what I understand the state of Cali will tax you on ANY profit you make elsewhere.  The only question is what is the 'rate'.

When you bring your profits back to Cali, they get taxed.  Just like if anywhere other than Cali was a foreign country.  Cali does have some 'agreements' with neighboring states, I think AZ and NV., but that's about it.

If you are looking OOS, consult a CPA BEFORE you buy.  I have a property in Cali.  I purposely mortgaged it so I wouldn't pay state income tax.  ;-)

I made Income - expenses - depreciation = ZERO.  This way I can put the depreciation in my pocket.  Perfectly legal.  Just like 'The Donald' does it, I'm just a TON smaller.  LOL.

Best of luck.

Jay Hinrichs · Answer

I agree with you.. to live in one of the highest income tax states then invest in a state with some of the highest prop tax's and other weather related and insurance issues. One needs to really run the numbers.. what I see happening is you buy the property next year tax's get reassessed and go up..

Now appreciation trumps this stuff.. of course.. so just weigh in all factors.

Now appreciation trumps this stuff.. of course..  so just weigh in all factors.

Jason D. · Answer

@Eric Black you should be paying income tax on those rentals.... California requires you to pay income tax on all earned income, even if it's out of state income. Do you have a CPA doing your tax planning?

Basit Siddiqi · Answer

@Loren NeufeldYes, CA is a high income tax stateYes, TX is a high property tax stateWith that said, it all depends on the numbers. I would rather invest in TX if the investment was cash-flowing and there is potential propects for the property to increase in value.You just have to factor in the property taxes into the cash-flow calculation.Furthermore, CA, despite being a high income tax state can potentially allow you reduce your California taxable income as a result of the property in TX.Speak with a tax advisor.

Loren Neufeld · Answer

@Alan Grobmeier Thanks for responding to my post with some very good thoughts.  I think the biggest takeaway is that I need to start looking for a new real estate specific C.P.A .  With my current one its like pulling teeth trying to get any advice for real estate tax planning!

Jay Hinrichs · Answer

Alan keep in mind all states that have state income tax   will tax you on all income .. not just CA.. that's why many folks jump over the Columbia river to SW Washington no income tax.. all your airline pilots live there for instance at least most. :)

Eric Black · Answer

Hi Loren. Thanks for sharing the article. We currently live in CA and own in TX and our experience has been that the benefit of no income tax far outweighs the higher property taxes. This obviously is property dependent. We bought two properties in TX in 2012. We have sold one but still have the other. While the property taxes are higher than we're used to even in CA, not having to pay income tax on the rental is huge. If you decide to choose another state/market that does have an income tax, you also need to factor in the costs of having to file an additional return in that state and how much that will cost depending on if you do your own taxes or pay someone to do them. It could potentially end up costing you more in income tax and filing fees than the additional property tax in TX. Also remember, the property taxes are a write-off. Income tax in another state is not.

Just some food for thought.

Cheers!

Account Closed · Answer

@Eric Black be careful bud. You’re supposed to be paying CA state income tax on that TX income

Eric Black · Answer

Sorry all, I misspoke. Yes, we have a CPA doing our taxes and yes, we are paying taxes on that income. Soon we won't have to as we'll only be CA residents for a couple more months. Sorry for creating confusion.

Loren Neufeld · Answer

Hey Eric, Your welcome for the article I came across it and just figured it had some potentially useful info in it. My thoughts were if  the Property Tax  Reform and Relief act passes will it instantly make Texas properties more valuable?  You have some very good points there some of which I hadn't considered.  Thanks again for your feed back!

Investing in high prop tax state without the income tax benefits?

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