With its sunny beaches, diverse economy, and booming cities, Florida has long been a desirable state for real estate investors.
Florida is also a tax-friendly state for real estate investors, providing one more reason to put your property investment dollars in the Sunshine State. Here’s what you need to know about Florida’s tax laws as a real estate investor, as well as an overview of how Florida’s tax system is beneficial for real estate investing.
Florida Income Tax Relating to Real Estate Investing
Alongside Nevada, South Dakota, Washington, Wyoming, Alaska, and Texas, Florida does not collect personal income tax. That doesn’t mean you won’t pay income tax to the IRS for federal taxes, but it means you’ll pay less overall income tax in Florida. And even if you don’t live in Florida, you can benefit from the state’s lack of income tax as an investor, which we’ll explain later in this article.
But first, it should be noted that Florida taxes corporations that conduct business, earn income, or operate within the state, and that this tax is calculated as a percentage of business income each quarter. This tax ranges from 3.3%-5.5% on corporate earnings over $5,000. However, as a real estate investor, you can avoid this tax, and take advantage of Florida’s lack of a personal income tax to pay a lower effective tax rate on your real estate investments.
Now, before proceeding to talk about specifics regarding taxes relating to real estate investing in Florida, remember that we are not accountants or tax layers, so consult your tax and legal professionals before doing anything relating to taxes and real estate investing. With this in mind, let’s continue.
Types of Taxable Entities in Florida
When conducting real estate transactions, collecting rent, or earning commercial property dividends from a Florida real estate investment, you will be taxed at the state’s 5.5% franchise rate if you operate as a “C” type corporation. You can get around this by filing as an “S” corporation, but there are still easier ways to escape business taxes in Florida.
#1 Sole Proprietorships and Partnerships
Sole proprietorships are defined as businesses owned by a single individual, and in Florida there is no distinct business or corporate tax on sole proprietors. And since there is no income tax leveraged on individuals in Florida, you can invest in real estate as a sole proprietor without paying state income tax.
The same goes for partnerships; Florida does not leverage a state-specific tax on partnerships. And while most states tax the revenue generated from partnerships, Florida does not. This means you can invest in Florida real estate as either a sole proprietor or partnership without paying state income tax.
Though perhaps a little more confusing, operating as an LLC in Florida can still afford real estate investors the benefit from Florida’s lack of an individual income tax. But, the LLC has to be setup properly to enjoy this tax benefit.
To form an LLC in Florida while living in another state, you’ll need an agent living in Florida to serve as a “resident agent”. If your LLC is composed of multiple members, it will usually be treated as a partnership for tax purposes, meaning you will not pay state income tax. Furthermore, if you are the only owner in your LLC, it will be treated as a “disregarded entity”, and you won’t pay state income tax.
Be aware, though, that it’s possible to setup an LLC so that it’s treated as a corporation under Florida’s tax code, which would result in paying Florida taxes. So, use a professional to setup your LLC to avoid paying Florida income tax.
Watch Out for These Complications
Florida’s lack of a personal income tax makes it a great place for real estate investors to conduct business. However, there are a few ways this picture can be complicated by external factors.
First off, depending on what state you live in, your state may leverage an income tax on income generated out of state, even if that income comes from a non-taxable legal entity in Florida.
Similarly, if the legal entity that you’ve formed to operate in Florida conducts business in other states, you may fall victim to “nexus” based taxes. “Nexus” exists when a business operates in more than one state, and the rules and regulations for businesses that fall into this category are extremely complicated. Again, consult tax and legal professionals before doing anything relating to taxes and real estate investing.
Things To Consider Regarding Out-of-State Real Estate Investing
From a tax perspective, there are numerous benefits for real estate investors in Florida. But if you live outside of Florida, there are logistic concerns to keep in mind.
Anytime you invest in real estate outside your home area, you need to do a great deal of out-of-town research to learn where to purchase investment properties. Plus, from a financial perspective, managing properties and tenants from long distance can be impractical, besides dramatically cut into your profits.
The solution, then, is to use local real estate professionals to find, purchase, rehab, maintain, and manage your investment properties. Though this cuts into your profits compared to self-managed real estate investments, investors aggressive enough to invest out-of-state probably use these professionals for all their real estate holdings.
The Bottom Line
There are major tax benefits for real estate investors in Florida, compared to most every other state.
If you are interested in real estate investing in Florida, consult your tax and legal professionals to learn how you can take advantage of Florida’s tax laws. Hopefully, you can significantly increase your profits by avoiding state income tax in Florida.
Then when you are ready to find real estate investment properties in Florida, we hope you allow us to show you the profits that can be generate by real estate investments in the Greater Tampa Bay area.
To do more research on Florida real estate investments and taxes, see these articles: