Key State Taxes Affecting Rental Properties

by Stephen Morris CPA, MBT, CCIM

🏠 Property Taxes: The Biggest Expense for Landlords

Property taxes are one of the most significant costs for rental property owners, and they vary widely by state and county.

📌 Key Factors That Affect Property Tax Rates:
✔️ State and local tax policies – Some states impose high property taxes to offset lower income taxes.
✔️ Assessed property value – Higher-value areas tend to have higher property taxes.
✔️ Reassessment frequency – Some states reassess annually, while others do it every few years.

💡 Example:

• New Jersey, Illinois, and Texas have some of the highest property tax rates.
• Hawaii, Alabama, and Louisiana have some of the lowest.

✅ How to Reduce Property Tax Burden:
✔️ Appeal overvalued property assessments.
✔️ Take advantage of homestead exemptions (if applicable).
✔️ Review local tax incentives for rental housing or energy efficiency upgrades.

💰 State Taxes on Rental Income

While rental income is taxable at the federal level, some states also impose additional taxes on rental income.

📌 How States Handle Rental Income Taxes:
✔️ No state income tax (e.g., Florida, Texas, Nevada, Tennessee) → Rental profits only taxed at the federal level.
✔️ High state income tax (e.g., California, New York) → Rental income taxed at both state and federal levels.
✔️ Local city/county taxes may also apply (e.g., New York City’s rental income tax).

💡 Example:

• Florida landlords pay no state income tax, while California landlords face rates as high as 13.3%.
• Investing in tax-friendly states can increase cash flow and profitability.

✅ How to Reduce Rental Income Tax:
✔️ Maximize deductions for mortgage interest, maintenance, and depreciation.
✔️ Set up LLCs in tax-friendly states (consult a CPA).
✔️ Consider 1031 exchanges to defer capital gains tax.

🏢 Transfer Taxes on Rental Property Sales

When selling a rental property, states may impose real estate transfer taxes or capital gains taxes.

📌 Transfer Taxes by State:
✔️ Some states have low or no transfer taxes (e.g., Arizona, Texas).
✔️ High-tax states like New York and Washington D.C. charge up to 2% of the sale price.

💡 Example:

• Selling a $500,000 rental in Washington D.C. could cost $10,000+ in transfer taxes.

✅ How to Minimize Transfer Taxes:
✔️ Use a 1031 exchange to defer capital gains tax.
✔️ Sell during tax-friendly periods or restructure ownership.
✔️ Consider installment sales to spread tax liability.

⚖️ State Tax Policies That Favor Landlords

Some states offer tax advantages for landlords to encourage investment in rental housing.

🌱 1. Tax Incentives for Affordable Housing

✔️ Low-Income Housing Tax Credits (LIHTC) reduce tax liability for landlords renting to low-income tenants.
✔️ Some states offer property tax reductions for affordable housing developments.

💡 Example:Oregon and California offer state-funded LIHTC programs that reduce taxable rental income.

⚡ 2. Energy Efficiency Tax Credits

✔️ Many states offer rebates and tax incentives for landlords upgrading properties with solar panels, energy-efficient HVAC systems, and insulation.
✔️ Federal tax credits can be combined with state-level energy incentives for double savings.

💡 Example:New York offers up to $5,000 in state tax credits for energy-efficient rental property upgrades.

🚀 3. No or Low State Income Tax

✔️ States like Florida, Texas, and Nevada allow landlords to keep more of their rental profits by eliminating state income taxes.
✔️ Ideal for real estate investors seeking long-term tax savings.

💡 Example:

• A landlord earning $100,000 in rental income in Texas (0% state tax) vs. California (13.3% state tax) saves $13,300 per year.

🔄 How to Adapt Your Tax Strategy Based on State Rules

🔹 1. Invest in Tax-Friendly States

✔️ Prioritize low-tax states (Florida, Texas) for higher after-tax profits.
✔️ Be cautious when expanding into high-tax states (California, New York).

🔹 2. Use Legal Structures to Reduce State Tax Burdens

✔️ Consider setting up an LLC in a tax-friendly state to minimize liability.
✔️ Use 1031 exchanges to reinvest gains and defer taxes.

🔹 3. Work With a CPA to Optimize State-Specific Tax Benefits

✔️ A tax professional can help navigate complex state tax codes.
✔️ Strategic tax planning ensures maximized deductions and reduced tax burdens.

📊 Final Thoughts: Mastering State Taxes on Rental Properties

State taxes can make or break your rental investment strategy—understanding and planning for them is essential for long-term success.

✅ Key Takeaways:
✔️ Property taxes vary by state—understand local tax rates.
✔️ Some states tax rental income, others don’t—choose your investment locations wisely.
✔️ Transfer taxes can reduce profits when selling—factor this into exit strategies.
✔️ Leverage state tax credits (affordable housing, energy efficiency).
✔️ Work with a CPA to ensure state-specific compliance and tax savings.

Back to Advise RE Resource Center articles list

RENTAL PROPERTY TAX STRATEGY

Tax Implications of Renting to Family or Friends
Landlord Tax Filing Checklist
Tax Rules for Vacation Rentals
Tax Planning for Long-Term Rental Investments
Tax Benefits of Energy Efficiency Upgrades
Mortgage Interest Deduction for Rentals
Managing Taxes on Commercial Rental Properties