Why should you invest in a net lease property in an income tax free state?
There are seven states in the United States that do not have a state income tax:
Alaska
Florida
Nevada
South Dakota
Tennessee
Texas
Wyoming
There are several reasons why an investor might want to invest in an income tax free state for commercial net lease real estate.
Pros:
More attractive to businesses. States with no income tax are often more attractive to businesses, which often leads to more jobs and economic growth.
More disposable income to attract an influx of residents. With more disposable income, residents and investors alike will have more money to invest, save, or spend on things they enjoy.
No state income tax on investment earnings for owners residing in those seven states. Investors can save a significant amount of money, especially if they are high-income earners.
Potential for higher yields. Investors may be able to achieve higher yields on their investments in income tax free states, as they will not have to factor in the cost of state income taxes.
Cons:
Higher property taxes. To make up for the lack of income tax, some states have higher property taxes. This is often not problematic in net lease investing as typically property taxes are pass through expenses paid directly by the tenant.
Higher sales taxes. Some states have higher sales taxes than other states.
Overall, in our opinion the pros outweigh the cons when considering an investment in an income tax free state for commercial net lease real estate. Experienced buyers often communicate to us they would like to buy in income tax free states only as one of their buying criteria. Given this trend it is worth strong consideration for investment performance and as an exit strategy to maximize the resale value. The decision of whether or not to invest in one of these states is a personal one, and investors will need to weigh the pros and cons carefully and may want to seek advice from a CPA before making their decision.
