State income taxes are often a complex subject that has major implications for real estate investors. Keeping your money in states without income taxes can be a good idea and allow you to keep more money in your pocket each year.
In which states there is no income tax, it makes sense to invest in it? How should you consider structuring your home rental business to optimize results? Understanding your potential tax liability in the nine states with no income tax can help you make the best decision for your next purchase.
alaska tax rate
When it comes to the states with the best income tax exemptions, Alaska ranks near the top. In addition to receiving money from the Alaska Permanent Fund each calendar year, residents there do not pay personal income tax.
Instead of levying an income tax on the more than 730,000 state residents, the state levies a business tax on their diverse industries. Much of the state’s annual budget comes from taxes on oil and gas properties, raw fish, the hospitality industry, and fuel transfer taxes.
tax liability implication
Although Alaska is a state without income tax, it does not mean that you will not have to pay anything for the rental property. If a small business controls your rental, you may be taxed between 2-9% depending on your earnings. More than 20 municipalities in the state—including the largest cities of Anchorage, Fairbanks and Juneau—assess an average per capita property tax of $2,276. You can also expect to pay local sales tax for rental home improvements, usually between 2-5%.
florida tax rate
Florida is turning from home to retirees into a haven for businesses, entrepreneurs and vacation seekers from high-income tax states. The southernmost state in the “Lower 48” is probably the most famous of states with no income tax on everything tourists and residents get.
Instead of a personal income tax, Florida collects revenue on a number of other products and services. The highest state tax on gasoline in the Sunshine State is 43.55 cents per gallon, with an average sales tax rate of about 7%.
tax liability implications
Real estate ownership in Florida will come with a combination of property taxes, ad valorem taxes based on the value of the property, and non-ad valorem assessment from local government services. Property owners can expect the average per capita state and local property taxes to be approximately $1,541 annually. Like individual state income taxes, sole proprietors, disregarded single-member LLCs, and pass-through S corporations that do not use Form 1120S to pay federal income tax are not required to file a business tax return. All other companies—including out-of-state companies and other LLCs—may be subject to a flat 5.5% tax.
Nevada tax rate
Possibly a direct result of the gaming industry, Nevada is also one of the few states with no income tax. The state does not assess a state business or corporate income tax to encourage entrepreneurs to move forward.
Instead of collecting a state income tax, Nevada charges some of the highest sales and gasoline tax rates. The United States and local sales tax rates average around 8.23%, while the per-gallon gas tax rate is 50.48 cents – the fifth highest in the United States.
tax liability implications
Property ownership in Nevada comes with local property taxes. In the 2022-2023 fiscal year, the average county tax rate on property is approximately 3.18%. Even with high local taxes, the Tax Foundation notes that the average per capita property tax is about $1,153 — still the nation’s lowest. Combined with no business or corporate income tax, Nevada may be one of the best states to own a rental property.
south dakota tax rate
The home of Mount Rushmore and Deadwood Mountain is one of nine states with no income tax for individual residents. South Dakota is also one of the few that does not institute a corporate income tax, allowing rental landlords to set up a structure that works best for their needs.
Like other states without an income tax, South Dakota makes revenue in other taxes. Along with the annual property tax, businesses can expect to pay an average sales tax of 6.4% and a gas tax of 28 cents per gallon.
tax liability implication
While there is no state property tax in South Dakota, local governments and special districts may assess property taxes within their jurisdictions. Property tax is based on the full market value of the land with an average tax rate paid of approximately 1.17%. Rental home owners in the state can expect to pay an average of $1,606 per person annually.
Texas Tax Rates
Everything is bigger in Texas—except the personal income tax rate. While Texas is the ninth largest economy in the world, the state constitution codifies it as one of the states with no income tax.
In addition, the tax laws are favorable to new and small businesses growing in the Lone Star State. Texas does not assess business taxes, personal income taxes, or other fees on sole proprietors, allowing them to continue investing in real estate and growing their businesses over time.
tax liability implication
Although Texas does not collect a statewide property tax, more than 4,000 local entities collect taxes on real estate. All property taxes are based on current market value and are uniform across many taxation districts. According to the Tax Foundation, the average per capita state and local tax burden on properties is approximately $2,216. For local maintenance items, property owners can expect to pay a sales tax of 8.2%.
washington tax rate
Known as the gateway to the Pacific Northwest, where the mountains meet the coast, Washington State is among the few states with no income tax. Both individuals and corporations are not taxed in the state, making it one of the best for doing business in the United States.
This does not mean that everyone gets away without paying their fair share for government services. Washington has one of the highest United States and local sales tax rates in the country at 8.86%. State gas taxes are also quite high, with drivers paying about 50 cents per gallon of fuel.
tax liability implication
The good news for landlords is that leasing or renting real estate for living is exempt from state business and profession taxes, reducing your overall tax liability. However, property taxes may still apply depending on the location of your rental home. Homeowners can expect to pay an average of $1,727 per person in annual property taxes, making it a comparable value.
wyoming tax rate
Images of cowboys on the range often come to mind when we think of Wyoming. More important for landlords, Wyoming is one of the few states with no income tax for individuals.
Instead, the state builds its income on the wealth of available resources. Mining operations for energy sources, including coal and oil, contribute significantly to the state’s tax base – giving residents and small businesses a break.
tax liability implication
Even though there is no personal or corporate income tax in Wyoming, homeowners must still pay property taxes. On top of an average sales tax of 5.36%, the average per capita property tax is approximately $2,100.
new hampshire tax rate
New Hampshire has a unique approach to taxes. While this is a state with no income tax on W-2 wages, that doesn’t mean taxpayers owe nothing at the end of the year.
Instead, individuals pay a 5% tax on dividend and interest income. The good news is that this doesn’t apply to rental income—which allows you to invest more in your business.
tax liability implications
One of the downsides of rental property investing in New Hampshire is property taxes. The state of New England has the nation’s highest per capita state and local property taxes, with average collections of nearly $3,300. In addition, depending on the structure of your rental company, you may pay additional corporate tax on your earnings.
Tennessee tax rate
One thing is that a volunteer state does not require its residents to pay income tax. The country music capital is one of nine states with no income tax.
But like New Hampshire, Tennessee’s taxes are more complicated than the other states on this list. State residents are subject to an annual tax on income from taxable dividends and interest, which includes interest trusts and mutual funds, interest on bonds, and certain shareholder distributions—noting one of the highest average sales taxes in the U.S. at 9.55%. Not there.
tax liability implications
Like other states with no income tax, Tennessee homeowners are subject to a local property tax. However, it is the lowest among all 50 states. The average per capita property tax collection is $845, according to the Tax Foundation. Along with property taxes, the top corporate income tax rate is 6.5%, which may affect you depending on the structure of your rental company.
general question
Why is sales tax imposed by states?
Sales taxes are imposed at the point of sale to support local and state government services approved by voters and legislators. Four states—Delaware, Montana, New Hampshire and Oregon—don’t charge a sales tax, while Louisiana, Tennessee, Arkansas and Alabama have some of the highest ones.
Is it better to live in a state with no income tax or no sales tax?
This depends on a number of factors, including your taxable income, investment strategy and the number of rental properties you manage. In general, those with higher incomes may do better in a state with no income tax, as it allows them to better save and reinvest their income, despite the higher sales tax.
What are the disadvantages of living in a state with no income tax?
There are two major disadvantages to living in a state with no income tax. First, state and local governments often make up the difference in higher sales, corporate or property taxes. Second, the low tax base often requires a delicate budget, which often means less money for infrastructure like schools.
Why does sales tax differ from state to state?
The US Constitution allows the federal government to set appropriate national taxes for public welfare, including the military, federal highways, and other infrastructure. The Constitution also allows states to set their own taxes, making sales tax a state issue. Therefore, different states, counties, and cities can set tax rates to reflect their budgets.
Why do more states like Texas have no income tax?
Policies and preferences determine state and local taxes, which vary from state to state. In the example of Alaska and Wyoming, high taxes on extracting natural resources allow their governments to provide tax savings to their residents.
Why do some states have higher taxes than others?
Each state government prioritizes its budget based on a number of factors including population, natural resources, industries and businesses. As a result, state income tax and sales tax reflect the diverse sources of income available to the government.
Which US Territories Don’t Pay Federal Income Tax?
Residents of five US territories are not subject to paying federal income tax to the United States government: American Samoa, Guam, Puerto Rico, the Commonwealth of the Northern Mariana Islands, and the US Virgin Islands.
Dreaded Tax Season?
Not sure how to maximize deductions for your real estate business? In Book on Tax Strategy for the Savvy Real Estate InvestorCPAs Amanda Han and Matthew MacFarland share the practical information you need to not only get your taxes done this year—but also to create an ongoing strategy that will make your next tax season much easier.
Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
