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Investing in States with No Income Tax: A Guide for Real Estate Investors

1040 tax formsHow much income tax do you pay on your investment properties?

Depending on your location and other factors, your tax rate could hover between 22% and 24%. This means if you earn a rental income of $100,000 in a specific year, you will pay between $2,200 and $2,400 in income tax. This is a highly simplified scenario. In reality, there is a lot that goes into calculating how much money you have to pay to the government.

For instance, as a property owner, you can deduct a part of your costs from the rental income before calculating the amount you owe in taxes. A few of the allowable deductions are insurance, advertising, mortgage interest, legal and professional fees, and property depreciation. These deductions let lower your taxes considerably.

But what if you did not have any income taxes whatsoever on your investment properties? Wouldn’t that be great? Yes, if that were possible, it would be magnificent. But does that option even exist?

As a matter of fact, it does. There are several states in the US where property investors are not required to pay any income tax. In this post, Upkeep Media Inc. lists some of them and explains good reasons why you should be thinking of buying property in those states.

Why Some States don’t have Income Tax

sign saying "taxes" over a pile of moneyGiven that taxes are one of two things that are certain in life, why would states not have an income tax? The idea is that by lowering the cost of living or of doing business, investors and businesses can be lured into the state.

More investments and businesses coming into a state mean more money available for the government, even if that money does not come from taxing income.

Nine states currently have this policy. They are:

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

Pros and Cons of Investing in a State with No Income Tax

The Pros

tax forms on a tableAvoid Double Taxation

Investing in these states will let you avoid double taxation; that is when you have to pay personal income tax in your home state and the state where your investment property is located. Typically, this is an important consideration when buying property in remote locations.

This additional cost can erase whatever attractions buying a property outside your home state holds. But without this burden to deal with, you have more freedom to invest in desirable far-off locations.

More Opportunities to Grow and Make a Profit

In the last ten years, states with low or no state income tax grew their populations by as much as 109% compared to states with higher tax rates. This is according to research by the American Legislative Exchange Council (ALEC). In addition to population growth, these states saw 130% more job growth than states that were more highly taxed.

Job growth and population growth are major factors in the growth of the real estate sector of any state. Investing in a state with no income tax means you can take advantage of its booming housing market.

However, before you decide to start buying investment properties in the nine states with no income tax, some other factors are to consider.

The Cons

No Income Tax Does Not Mean No Tax

State governments in states with no income tax still have the same duties as governments in states with income tax. For instance, they still have to fund infrastructure development, public services, and law enforcement agencies.

The money for doing these things has to come from somewhere, and the typical way these governments raise funds is by increasing taxes elsewhere. This is why:

  • Washington has one of the highest gasoline tax rates in the country. It charges 49.5 cents per gallon in gas taxes and fees.
  • In Tennessee, the state charges a high 7% sales tax, and the combined sales tax – both state and local – for the state is 9.47%
  • Owners of real estate in New Hampshire pay property tax at the rate of 2.03%, higher than the rate in neighboring states with income tax.

To Invest or Not Invest: What is the Conclusion?

On the whole, the advantage of investing in a state with no income tax is partly eroded by higher taxes in other areas. Although some of these other taxes do not affect investors directly, they affect the people who will eventually rent the homes investors buy. What affects the disposable income of renters impairs the ability of rental property owners to make money.

Nevertheless, states with no income tax are still a viable option for property investors, as long as they:

  • Perform a thorough market analysis before investing in any of these nine states.
  • Talk to a tax specialist to get an idea of their overall tax burdens.
  • Hire a competent realtor to make sure they buy low in the best locations.

We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.

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