Taxes for Out of State Investments

[Brittney Wright]

I am looking for clarification on the tax implications of purchasing investments properties outside of the state of Texas. I currently reside in Dallas where my LLC was formed and will remain based. I am considering purchasing rental properties in the Milwaukee, WI area and would like to understand how my rental income will be taxed in both Wisconsin and Texas, if at all. Would you mind providing information on how this works and any pitfalls to avoid.

[Account Closed]

Investing in rental properties outside of your state of residence, such as Texas, can have tax implications at both the state and federal levels. Here's an overview of how rental income from properties in Wisconsin might be taxed and some considerations:

Wisconsin State Taxes:

1. Income Tax: Wisconsin imposes a state income tax on rental income. Rental income you earn from properties located in Wisconsin is subject to Wisconsin income tax, even if you are a Texas resident.
2. Nonresident Tax Filing: Since you reside in Texas, you would likely be considered a nonresident in Wisconsin for tax purposes. This means you'll need to file a nonresident state income tax return in Wisconsin to report your rental income earned in that state.
3. Deductions and Credits: Wisconsin has its own set of rules for deductions, credits, and expenses related to rental income. Consult with a tax professional or accountant familiar with Wisconsin tax laws to optimize your tax strategy and identify any available deductions.

Texas State Taxes:

1. Income Tax: Texas does not impose a state income tax on individuals, so you won't owe any Texas state income tax on your rental income, regardless of where the rental properties are located.

Federal Taxes:

1. IRS Reporting: You are required to report all rental income, regardless of where the properties are located, to the IRS on your federal income tax return.
2. Tax Deductions: You can deduct various expenses related to your rental properties, such as mortgage interest, property taxes, maintenance costs, and depreciation, on your federal tax return. Be sure to keep accurate records of these expenses.

Pitfalls to Avoid:

1. State Tax Compliance: One common pitfall is failing to comply with state tax laws. Ensure that you file the necessary state tax returns and report your rental income accurately in both Wisconsin and Texas.
2. Tax Planning: Seek the guidance of a tax professional or CPA who is knowledgeable about both Wisconsin and Texas tax laws. They can help you develop a tax-efficient strategy for your out-of-state rental investments.
3. Local Regulations: Besides state taxes, be aware of any local tax regulations and requirements in the specific areas of Wisconsin where you plan to invest. Local ordinances and tax rules can vary, so it's important to understand and comply with them.
4. Record Keeping: Maintain detailed records of all income and expenses related to your rental properties. Good record-keeping is essential for accurate tax reporting and potential deductions.

In summary, rental income from properties located in Wisconsin will be subject to Wisconsin state income tax, even if you are a Texas resident. However, you won't owe Texas state income tax on this income. Federal tax rules also apply, and you can deduct eligible expenses. To navigate these complexities and optimize your tax situation, it's advisable to work with a tax professional who can provide personalized guidance based on your specific circumstances.