State Tax Considerations for Real Estate Investors

If your rental is in a state with an income tax, that state taxes the rent, and usually the gain when you sell, even if you live somewhere else, so you file a nonresident return there for each year your income meets its filing threshold. Your home state taxes the same income but generally gives you a credit for the tax paid to the property's state, up to its own tax on that income, so you pay about the higher of the two states' tax. The property's location also sets your yearly property tax, the transfer tax when it changes hands, and whether tax is withheld from your sale proceeds.

Which state taxes your rental income

A state with an income tax generally taxes rent and gains from property located there, and taxes its own residents on income from every source. A Texas resident with a California rental files a California nonresident return for it. A California resident with a Colorado rental reports the rent to both states and claims a credit on the California return.

The property's state sets the filing threshold, and the test can count all of your income, not just the rent. For 2025, California requires a nonresident return from a single filer under 65 with no dependents who has California-source income and more than $22,941 of gross income or $18,353 of adjusted gross income from all sources. An owner with $60,000 of wages files even if the California rental shows a loss.

The state return can also differ from your federal one. California taxes your California income at the average rate it would charge on your total income, so $20,000 of California rental profit is taxed at the rate for your whole income. California also does not follow some federal depreciation rules, or the federal rule that lets real estate professionals deduct rental losses against wages, so your California rental income or loss can differ from the federal figure.

Eight states have no individual income tax for 2026: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. Washington taxes only capital gains, and its capital gains tax exempts real estate. If you live in one of these nine states, the property's state is the only one that taxes your rent. Missouri taxes rent but exempts capital gains from its income tax.

Holding the rental in an LLC that passes its income through to you does not change which state taxes that income. LLC tax benefits for real estate investors covers state LLC taxes and fees, and quarterly estimated taxes covers paying tax on rent during the year.

How the home-state credit works

California's Schedule S shows how the cap is figured. The credit is the smaller of two amounts: the California tax on the rental income (your California tax times the rental income's share of your California adjusted gross income) or the tax the other state charged on that income.

Example. A California resident has $200,000 of California adjusted gross income, including $20,000 of net rent from a rental in another state, and owes $12,000 of California tax before credits. The rental's state charges $900 on its nonresident return.

If the rental's state had charged $1,500, the credit would stop at $1,200 and the total would be $1,500.

A few state pairs reverse the credit. California gives its residents no credit for tax paid to Arizona, Oregon, or Virginia, because those states give the credit on their own nonresident returns, and California gives the credit on its nonresident return to residents of those three states. Whichever state gives the credit, prepare the other state's return first, because the credit is figured from the tax shown there.

Withholding and estimated tax when you sell

California. The closing agent, such as the escrow or title company, withholds 3 1/3% of the sales price for the Franchise Tax Board, or 12.3% of your estimated gain if you elect that method as an individual. On a $600,000 sale, standard withholding is $19,980. Nothing is withheld if the price is $100,000 or less, or if you certify an exemption on Form 593: for example, the sale produces a loss or zero gain, you owned and lived in the property as your main home for 2 of the 5 years before the sale, or the sale is part of a 1031 exchange, a trade of one investment property for another that defers the tax on the gain. Cash or other property over $1,500 that you receive in an exchange is still withheld on. Give Form 593 to the closing agent before closing; afterward, you recover excess withholding only by filing a California return. An exemption from withholding does not exempt the gain from tax.

New York. A nonresident seller figures the gain on Form IT-2663 and pays estimated tax of 10.90% of it, the 2026 rate, to the county recording officer when the deed is presented for recording. No payment is due if the sale produces a loss or the gain is not recognized under a federal rule such as a 1031 exchange. The payment counts as estimated tax toward your New York nonresident return for the year of sale.

For a rental in another state, ask the closing agent which withholding or exemption forms apply. Capital gains tax on investment property covers the federal tax on a sale.

Property taxes: the yearly cost the location sets

State law and local governments set property tax rates and assessment rules. The Lincoln Institute of Land Policy's comparison of taxes paid in 2025 found an average effective rate (tax as a share of market value) of 1.504% on a $600,000 apartment building with $30,000 of fixtures in the largest city of each state, about $9,473 a year. The range was wide:

Houston, Jacksonville, and Nashville are all in states with no income tax, and their rates run from below the 1.504% average to well above it.

Rentals often pay a higher rate than owner-occupied homes in the same city. In the 2024 study, apartment buildings faced an effective rate 44% higher on average than a median-valued home, and 36 of the 53 cities favor homes by law. The breaks include homestead exemptions and credits for owner-occupied homes, a lower assessment ratio (the share of value that is taxed) or tax rate, and assessment limits, which cap yearly growth in a property's taxable value and, in most cities, reset it when the property sells (New York City and Portland, Oregon, are exceptions). In Los Angeles, the study found that a new buyer of a median-valued home pays 117% more than an owner of 15 years. Before you buy, check whether the seller's bill reflects a homestead break or capped growth that will not carry over to you, ask the local assessor how the property will be valued after your purchase, and budget from the rate a rental pays.

Transfer taxes when you buy or sell

Transfer tax rates, and who pays them, vary by state:

• Pennsylvania charges a 1% state realty transfer tax on the property's value, often with a local transfer tax added, and the buyer and seller are both liable for it. On a $300,000 sale, the state tax alone is $3,000.
• Washington charges a graduated real estate excise tax, which the seller usually pays. For sales through December 31, 2026, the state rate is 1.10% on the first $525,000 of the price, 1.28% on the part up to $1,525,000, 2.75% on the part up to $3,025,000, and 3% above that, plus a local rate. On a $700,000 sale, the state tax is $5,775 plus $2,240, or $8,015, before the local tax. From January 1, 2027, the 1.10% band covers the first $551,000.

When you compare markets, count the transfer tax at purchase and at sale, including the local rate. Buying and managing a rental in another state covers the practical side of owning at a distance, and tax planning strategies for rental property income covers the federal rules.