Is it time to move out of a high tax state?

Question

I have an issue that I never though of until I started looking at real estate in different markets. I'm from IL which is what I learned a high tax state not just for property but for everything.

I inherited the family house a 3 bedroom 1 1/2 bath ranch, my grandfather bought the property, dad built the house and i remodeled after my fathers passing. This makes a decision to leave emotionally difficult.

The numbers $300K+ value, nice neighborhood, park across street, forest preserves nearby, friends all around area from 5 min to over an hour away. Property taxes $10K per year with home owners exemption. I work an hour away, in an area close to Indiana and south of Chicago where housing is cheaper.

I have 4 rentals that have good equity but low cash flow. High taxes cause loss of cash flow.  All rentals near work as houses were much cheaper but good rental market.

So I started looking for rentals in Indiana and Vegas and saw taxes 10%-30% of IL for similar houses and values. As I looked I found some nice 3 bed 1-2 bath houses for $130-150K with 1K property taxes. Some with up to 1/2 acre of land by a nice lake. Gas is $0.20 a gallon cheaper in IN then IL on average, so many costs would be reduced.

Looking to retire in 5 or so years looking that moving to IN (15 minutes to work) would save me time, money and property taxes. $8-9K per year. In the 5 years to retire I could have an extra $40K and that saving continues. I could use the extra money form the house sale to fund some cash flowing properties in areas with reduced taxes that I could afford property management.

I'm slowly working on the emotional attachment to my house but wonder if anyone else has made similar choice, and how to worked out.

Gary Headrick · Answer

Steve, step back and re-read your post. I think you've answered your own question. IL is pretty well bankrupt with unfunded public pensions which will come into effect at some point. Plus I think at least 2 of the last 3 governors went to jail.

Lynnette E. · Answer

It is hard when you have to sell houses that you are emotionally attached to.  After my mom passed away I had to sell the properties in her and my dad's family trust.  It included the house I lived in from 0 to 8 years old (which was a rental at the time I had to sell it)  and the house I lived in from 8 into adulthood.  Both my parents died in hospice at this house.  It was hard, and we did discuss with the eleven heirs keeping the properties as rentals, but knew it would not work with that many heirs.  (Some of the heirs would sit with their hands out each month for money, and argue to not do any maintenance, just give them the money.  They already were arguing about taxes and insurance, even though the money for this did not come from them but from the Trust account.  So it was decided to sell all the properties and those that wanted income property could invest their share in their own income property.

Emotionally it is hard, but it is freeing in the end when it is done and someone else is living in the property and owns it.

Rick Pozos · Answer

Dont worry about what could be. How are things going for you right now?? Not bad, right? There is no perfect state to invest in. Some have lower property taxes, but state income tax. Some, like Texas has not state income tax, but high property tax and stronger landlord laws. There are pluses and minuses everywhere.

People tell me to move from Texas because of the high property taxes, 2.8% and re-appraised every year!! It works for me here. I love it here and will probably never leave for more than a few weeks at a time. There is no perfect place.

Mark Plesha · Answer

@Steve Hyzny I live in Highland, IN and invest here as well. I agree with what someone else posted above, it seemed like you answered your own question. I'm sure the emotional attachment will be hard to get over, but financially speaking, with everything you said it makes the most sense. We are seeing a wave of people coming from IL for the exact reasons you just pointed out which is driving higher property values because there is no supply right now. My wife and I bought our house for $135k 5 years ago. It is a ranch that was completely outdated. A home similar to ours a few streets over just went up this week for sale by owner for $245k. I still can't wrap my head around it. Anyways, if you have any questions about our market or best areas to live/buy in feel free to reach out to me.

Russell Brazil · Answer

Living in the DC area is an interesting experiment in taxes since we have 3 jurisdictions all with very different tax rates. DC has the lowest property taxes of the 3 states, then Virginia, then Maryland. (They are all relatively close). Income taxes are a little more nuanced as it depends based on your income level who is highest or lowest. My part of Maryland though since I hit the highest threshold, is higher than DC and Virginia. Virginia taxes your vehicles though which the other 2 do not. DC and Maryland have a higher sales tax than Virginia.

So, I could pay effective lower taxes by living on the Virginia side of the border, but have absolutely zero desire to. Parks, schools, roads, the layout differences in neighborhoods, the layout of public transportation, layout  of toll lanes,....all kinds of things make me live on the Maryland side of the border.

Joe Splitrock · Answer

@Steve Hyzny taxes are not the only reason people choose to live in a specific state. If it was the only reason, nobody would live in NY, CA or IL. My point is, it is not a question of whether moving to a lower tax state would benefit you financially. That is a fact. The only question now is quality of life, which includes the many reasons people choose to live where they live. Weather, politics, schools, crime, location of family and friends, employment opportunities, social and environmental aspects, diversity, cultural, arts and entertainment, cost of living, taxes, population density; are just some of the reasons.

If you can retain the aspects that are important to you and pay less taxes, of course go for it. Keep in mind if you still work in IL and live in IN, you are likely still stuck filing IL non-resident income taxes. Still an overall savings considering property taxes, but your W2 income will likely still be hit harder.

Bill O'Donnell · Answer

@Steve Hyzny

You should live wherever you want to live. You should invest where your money is welcome and profits can be had. Make enough money that you can afford the taxes. And stay if it suits you, or move if you prefer.

I live in Nuevo Yorkistan under king Coumo.

But I find a way to prosper, and I live near friends and family...

Karl B. · Answer

@Steve Hyzny It's one of the reasons I left California (+ traffic+pollution+the fact I couldn't buy-and-hold locally to achieve any sort of decent return). I was tired of the stupid, ridiculous 13.30% capital gains tax rate and my property taxes weren't cheap either (and whomever buys my house will be paying roughly 3X what I paid in property taxes - insane).

Capital Gains in IL isn't too bad though I'm unfamiliar with the other state and local taxes in your area.

In a lot of areas there are tax trade-offs (TX has no capital gains but has higher property taxes in many cities), (in my PA market the capital gains are low but the property taxes are high VS assessed value), (in MO where I invest the capital gains rate is alright as is the property taxes though there's a growing, solid economy here).

Brian G. · Answer

@Steve Hyzny your post lacks a little clarity, but let me speak to the question I think you are asking. We live in Southern CA and as such it’s pretty tough to invest and profit locally. The taxes are not the main issue, rather it’s the high prices. The cost of living is very high of course and CA loves to tax it’s citizenry. We decided to invest OOS simply because we wanted to start a STR biz and sought out a market where that strategy is in high demand (ie a Vacation Market). Property taxes certainly are very low where we are investing but that was not the primary driver. We rent in So-Cal and invest in TN. Where we are investing has no bearing on where we may retire someday if in deed we do move out of CA. However, if we had such a plan and where we intended to retire was also a great place to invest in RE we would no doubt begin investing there. So in summary, live where you want to live and invest where the risk adjusted returns for the strategy you are pursuing make sense even if that’s in two different states. If you can find a city/market you want to live in and invest in then all the better. That’s ideal imo.

Is it time to move out of a high tax state?

Most Popular Reply