If I am in one state and I purchase rental property in another, do I need to get a business license in the other state?
If I do not purchase property in the state in which I reside, do I need to get a business license in that state? Or do I only get one in the state in which the property is located?
If I have positive cash flow in with the property in one state, but I reside in another, do I pay taxes on the positive cash flow in both states? Are there credits or deductions to help out with the double taxation (if there is)?
This is a great forum and I really appreciate the input and responses I get here. This information is valuable and much cheaper than an appointment with an Atty for an hour.
You need a license if your home state requires a license to manage assets that not located in the home state. Chances are that a license is not required.
I have to leave this to the tax experts, but I will say you can have positive cash flow and negative taxable income.
I own rental property in another state and pay an annual business license to the local county govt where the property is located. Cash flow is good but you only pay tax on taxable net income which can be very different. You report your rental property net income on sch E (or similar) of your federal tax return. You file a state tax return if required in the state where you reside. Typically your adjusted gross income from your federal return is used as a starting point for your state return. I am not a tax expert but this has been my personal experience.
You’re asking alot of questions and getting alot of answers, which is what the forum is for, I do it myself. But you’re asking all these questions about owning property in different states and such and in my opinion you shouldn’t be even thinking about having operations anywhere except your own backyard right now. A previous post of yours stated that you are just starting out and you are trying to figure out how to do a deal, which is good, but you better think about doing it close to home right off, of course unless you came across some super-duper-out of this world-deal. To begin your portfolio you’re going to want to manage the property yourself that way you can learn the ins and outs of not just your first property but the business as well. By managing the property yourself you are also making your management operations more effecient, henceforth saving you money. You go buying properties in neighboring states and rest assured you’ll have to hire a property manager and incur the costs and issues that can arise out of that.
Another thing…When you ask us about forming a business for your company keep in mind that you’re probably going to get as many different responses as there are states represented here on the forum. Call your secretary of state and have them tell you what you need or track down your local Small Business Development Center. Doesn’t cost you a thing and they will have all the forms you need and can hold your hand throughout the process of registering your business. I would hold off hiring a professional of any sort for now because you’re just starting and those fees can be tough on a new business, of coure they will be an integral part as you grow, but for now save yourself the money.
The answer to your question is state specific, and may depend upon the number of properties you own. As a general rule, if you are operating your rental activity in your own name, no business license is required because rental income is generally exempt from sales and use taxes.
Some jurisdictions have a rental unit license requirement for each rental property you own in that jurisdiction. This is not to be confused with a business license.
If I have positive cash flow in with the property in one state, but I reside in another, do I pay taxes on the positive cash flow in both states? Are there credits or deductions to help out with the double taxation (if there is)?
You have to file a tax return for each state in which you have a source of income. I have rental property in three states. I file a state tax return in all three (non-resident return in the states where I don’t reside).
Don’t worry about double taxation. Each of your non-resident states will only tax the income earned from sources within that state. Your resident state will tax all income, but will normally give you a credit for the taxes paid to the non-resident states. No double taxation.
Even if you don’t have any net taxable income from a non-resident state, I would still file a tax return in that state to preserve your entitlement to a tax deferral from state income taxes if you want to do a 1031 exchange.
Yes, I realize I am asking a lot of questions regarding set up and other state statutes. I live in CA and in a very expensive place, so I will not be able to invest here. The only way to get a foot in the door, I feel, is it invest out of state. I grew up here in CA and am really just getting my career going, and with family here also, I am not going to be moving anytime soon. I’ve talked with a couple mortgage brokers and money down is pretty much an assured thing, which I don’t have much so. So, again, I really have to look out of state.
Managing property… I guess that depends on the state I purchase in. Yes, most likely I will have to get a property manager since I’m not close by. I’ll have to check the consequences with the loan, I didn’t know there could be stipulations regarding property management.
Thanks for the feedback. I’m really just trying to cover my bases before I end up purchasing something.
You’re talking about single family dwelling units that you will finance with a non-owner occupied residential loans, right? I don’t know of any loan stipulations regarding property management. I have never had a loan officer make property managment a condition of the loan.
Please tell us what you heard about this and in what context.
I could understand a lender’s concern about property management if you are talking about a non-recourse commercial loan where the potential income the property can generate is a factor in the loan amount, but this is not so for a residential mortgage loan.