Client Q&A - NNN - No Income Tax States and Multiple State Strategies

1031 Exchange Passive Income and NNN Investment Series by 1031 Navigator

Today Thomas discussed pursuing a NNN multiple state strategy and/or no/low income tax state strategy for triple net properties and other commercial investment real estate.

This episode is based around an email to client re a question he asked:

Michael, you had also asked about a multiple state strategy in the no income tax states. Many people I work with and many investors across the country do this but due to this demand it makes the cap rates lower in these states. i.e. a deal in FL, TX or NV will be 50 to 100 bps lower on cap rate.

Per the other email (with supreme court notes) it depends on your accountant and where they will have you pay the state taxes. Several clients who are residents of CA or NY for example are planning long term by buying in tax free states and plan to eventually become residents of NV or FL respectively.

To me, yes lowering income tax is great but if the cap rate already reflects it, it is a moot point. i.e. most states income tax rates are 4-6%. Let's say you buy in one of those states at a 6.25% cap rate and the same property in a tax free state is 5.75%. This is an 8% reduction in income. So tax to tax it would make sense to buy in a 5% tax state and keep 3% more. However, the main tax free states TX, NV and FL are also considered sun-belt states and will most likely hold value better due to population growth. So.... it pretty much becomes a wash.

Again, it goes back to one of the earlier points that it is really about the property/deal itself and whether or not it stands on its own two feet. Hence finding the best deal in terms of population, traffic, crime, tenant, lease length, building construction, site location, cap rate etc comes first and the state tax ramifications second. To me, it seems to not make sense to buy a sub-par property just to save on state tax.

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Thomas Morgan, CCIM

Andrus & Morgan Co.

970-618-4086

www.andrusmorgan.com

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