Invest in State Income Tax states vs. Non-State Income Tax states

[Charles Moore]

Hi, all!

Am seriously looking at buy-and-hold investing out-of-state due to more expensive markets here on the West Coast. Am located in Washington, which is one of only 7 states in the US that has no individual state income tax (the others are Alaska, Nevada, Wyoming, South Dakota, Texas, and Florida. Tennessee and New Hampshire are similar, but charge state income tax on dividends and interest income). Have narrowed my search down to Memphis and Dallas-Fort Worth, but have heard good things about Birmingham, Indianapolis, Ohio, and Kansas City as well.

So my questions: would state income taxes affect my annual bottom line, or would normal business expenses and depreciation wipe those out on paper so I would not have to pay them anyway? And if I owe nothing, would I still have to file in each state that requires state income taxes?

[Jon Holdman]

Generally you must file a tax return in every state where you have income.  Generally because a few states, such as Texas, don't have state income tax.  You will only pay income tax on the income from that state.

Crappy buy and hold deals end up with negative taxable income.  Sellers often promote this as a positive, because, they claim, you can use that passive loss to offset other income.  That may or may not be true for you, and the depreciation deduction does come back to haunt you when you sell.

Good rentals do have positive taxable income, even after all expenses and deductions.  So, if you buy good deals, yes, you may have to pay some tax.