Owning property in different states sounds like the ultimate power move. Diversified investments, multiple income streams, maybe even a vacation home you can write off. But what many real estate investors don’t realize is that multi-state property ownership comes with complicated tax rules that, if handled incorrectly, can drain your profits fast.
Think you’re off the hook because you moved to a state with no income tax? Not so fast. State tax laws don’t care where you want to live; they care where you make money. If you own property across state lines and don’t have a strategy, you could be overpaying taxes, facing double taxation, or even triggering an IRS audit.
Let’s break down what you need to know to protect your money and avoid unnecessary tax bills.
The Tax Traps of Owning Property in Multiple States
1. State Income Tax: Where You Live vs. Where You Owe
Just because you live in Texas (zero state income tax) doesn’t mean you’re in the clear. If you own rental property in California, New York, or any other high-tax state, those states can still tax your rental income.
What that means for you:
- Rental income is taxed in the state where the property is located.
- Moving to a no-tax state won’t eliminate your tax bill if your rental income comes from a taxed state.
- Some states even require non-residents to file tax returns, adding another layer of complexity.
Example:
You move from California to Texas, thinking you’ve escaped that 13.3% California state tax. But your rental property in Los Angeles? Still subject to California’s tax laws.
A CPA in Austin, Texas can help you determine where you actually owe taxes and how to structure your income to minimize your liability.
2. Property Taxes: Different States, Different Rules
Owning property in multiple states means multiple property tax rates, different assessment rules, and potential tax penalties if you don’t structure things correctly.
What to watch out for:
- Some states increase property tax rates for non-resident owners.
- You could lose out on tax breaks (like homestead exemptions) if you claim residency elsewhere.
- States with high property taxes like New Jersey, Illinois, and Connecticut can eat into your rental profits fast.
Example:
You live in Texas (low property taxes) but own an investment property in New Jersey (one of the highest property tax rates in the country). If you don’t plan correctly, you could end up paying thousands more than necessary just in property taxes.
An Austin tax accountant can review your property tax exposure across states and help you find legal ways to reduce your overall tax burden.
3. Residency Audits: Are You Really a Resident of That No-Tax State?
If you move from a high-tax state to a no-tax state, don’t be surprised if your former state tries to claim you as a resident for tax purposes.
Red flags that can trigger a residency audit:
- You still own property in the high-tax state.
- You spend a significant amount of time in that state.
- You maintain business interests, voter registration, or a driver’s license in the old state.
Example:
You move from New York to Texas, but you still own an apartment in Manhattan, frequently travel back for business, and keep a New York driver’s license. New York might still claim you as a tax resident—meaning you’re on the hook for New York state taxes.
A tax advisor in Austin can help you document your residency properly to avoid getting caught in a tax battle with your former state.
4. How You Own Your Property Can Impact Your Tax Bill
The way your rental properties are structured legally can determine how much tax you pay and where you pay it.
Consider these ownership structures:
- LLCs – Some states charge hefty LLC franchise taxes, while others don’t tax LLCs at all. Choosing the right state to form your LLC
- Trusts – Can be useful for estate planning and tax reduction
- Personal Ownership vs. Business Entities – Depending on the state, shifting ownership under an entity based in a low-tax state could reduce tax exposure.
An Austin small business accountant can help you structure your property ownership for tax efficiency while keeping everything fully compliant.
If You Own Property in Multiple States, Your Tax Situation Is More Complicated Than You Think
You wouldn’t make a major real estate investment without a solid financial plan so why would you ignore the tax side of things? Without the right strategy, you could overpay in taxes, face unexpected penalties, or trigger a costly residency audit.
At Insogna CPA, we specialize in multi-state tax planning for real estate investors, helping you:
✔ Minimize state income tax liability
✔ Reduce property tax burdens across multiple states
✔ Avoid IRS and state residency audits
✔ Optimize your real estate portfolio for long-term tax savings
If you own property in multiple states, your tax situation is more complex than you think. Let’s strategize together. Book a call today.