Out of State Income Tax Question - Texas Investor considering Ohio

[Raky Patel]

Hey y'all, I am considering buying out of state in a market that has state income taxes. I live in Texas where we do not have state income taxes. In this case, how does that work? It is my understanding that profit made from an investment out of state will be subject to state income taxes. Just for the sake of numbers lets say I make $100k/year here in Houston. If I buy a property in Ohio and profit $3k on it, am I only taxed on the $1500 (factoring in $1500 depreciation: 3k-1500)? Do they use my total income earned from out of state and in Ohio to determine the basis for my tax (could be a difference of .5% and 5%)? I just need to better understand the tax impacts you guys are having for investing out of state. If anybody invests in Ohio, I would love to hear from you with regards to the state income taxes you pay. Sorry if this email is confusing, I have a bunch of thoughts in my mind... 

[Timothy Murphy III]

@Raky Patel

After a brief bit of research here I have determined that you most likely should be filing an Ohio income tax return. According to the Ohio Department of Taxation, "every nonresident [of Ohio] having Ohio-sourced income must also file." Income or gain from Ohio property is specifically listed as an example of Ohio sourced income. Website available here: 

http://www.tax.ohio.gov/ohio_individual/individual...

I believe that you would only be responsible to report to Ohio (and pay tax to Ohio) for Ohio sourced income. As you've described it, that would most likely be net operating income from your property(ies) after all allowable business deductions, including interest and depreciation.

When tax is owed to multiple entities, a partial or complete credit is often allowed. For example, in the Cleveland area many of the suburbs are subject to local income tax through the Regional Income Tax Agency (RITA). Cleveland area residents often live in one RITA community and work in another, leading to local tax owed to multiple cities. As a result, the taxpayer typically receives a credit for tax paid to one city resulting in a reduction in the tax owed to another city. There may be similar deductions, credits, or benefits available to you paying state tax to Ohio.

Just like the post above mine states, don't rely on this as credible or actionable legal advice. While I am licensed to practice law in Ohio and also do a good bit of taxation work, every situation has its own unique set of facts. Without talking to you in detail, it's impossible for me to know exactly what you should or shouldn't do. No attorney or CPA, no matter how good, can provide you actionable and reliable information in a setting such as this.

I hope this serves as a good starting point for you to do further research and / or retain a professional to assist you. Feel free to contact me if you need further assistance.