October 6, 2023

JF3319: Should You Move to a Zero Tax State? | Passive Investor Tips ft. Travis Watts




Passive Investor Tips is a weekly series hosted by full-time passive investor and Best Ever Show host, Travis Watts. In each bite-sized episode, Travis breaks down passive investor topics, simplifying the philosophy and mindset while providing tactical, valuable information on how to be a passive investor.

On this episode of Passive Investor Tips, Travis discusses the financial benefits of moving to states with lower or zero income taxes in the United States. He shares his personal experience of moving to Florida for tax savings, housing affordability, and lifestyle improvements. The episode explores factors to consider when evaluating such a move, like income, housing, and employment, and provides examples of potential tax savings based on different scenarios, highlighting the ongoing trend of people relocating to tax-friendly states.

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Travis Watts:
Welcome back Best Ever listeners to another episode of passive investor tips. I'm your host, Travis Watts.

And today's episode, what we're talking about is should you move to a zero tax state, disclaimers is always never financial advice, not telling you or anyone what to do with your money or in this case, where to move.

So with that top of mind on this series, as you know, we talk a lot about real estate and investing and passive income. But as the saying goes, it's not what you earn, it's what you keep. So in today's episode, I wanna cover how to save money while you sleep.

So as you know, here in America, every state is different and unique. We have high tax states, we have zero tax states, and we have states that are kinda in between. Some examples of high tax states in this conversation, we'll be talking about New Jersey, for example, at 10.75 state income tax, Hawaii at 11%. California up to 13.3%. This is a tax based off of your active income sources. And a few examples of zero tax states would include Wyoming, Texas, Florida, Tennessee, just to name a few. There's several more to consider.

So a quick backstory on this episode. My wife and I, we moved from Colorado to Florida in 2017 permanently. Most of my life I've been back and forth between those two states. But it really came down to three factors. One was taxes. Two was housing affordability. And three was lifestyle preference. See in Colorado, the crime had been increasing in our area. The traffic was getting very congested. There was a state income tax of about four and a half percent. And quite frankly, we were just getting tired of the cold winters and we were looking for a change up. And I think the final straw for us was when my wife got pregnant with our son, we had to make a decision where we wanted to be longer term and on a more permanent basis. So we chose Florida.

For us, it was a fairly easy decision. We were able to sell our house in Denver, move to Florida, buy a comparable sized home for about $150,000 less, increase our quality of life, have warmer weather and a more enjoyable lifestyle. And believe it or not, our property tax and insurance was relatively the same because even though Florida was inflated in those areas, we were actually purchasing a house that was cheaper than what we previously owned. So it was all about a wash in terms of housing.

One additional consideration that was unique to Florida is that you can homestead a property. So if you live there full-time and you're an owner-occupant in that house, then they cap your property tax increases at a max of 3% per year. That's been in tax since 1995. And I can remember just a short few years ago, owning properties in Colorado that were rentals. And some of those property tax assessments would go up 20, 30, even 40% in one year. So that was very near and dear to my heart. Something I was looking forward to saving on as the years progressed.

So that's a little bit about our backstory and rationale, but let's talk about you and whether a move might make sense. And I want to share one additional story by author and speaker Tony Robbins. I remember reading in his book, Money Master of the Game, he moved from California to Florida in 2013. They purchased a mansion, quite frankly, in Palm beach for $24 million. And he wrote in the book, they were able to pay off that house in six years, just solely based off the tax savings he otherwise would have allocated to the state of California. Now that's an extreme example. Yes, he was motivated by taxes. That was the primary motivator to make the move in the first place. But what about your circumstances? How would you go about evaluating your own situation in that instance?

So here's a few considerations starting with number one, your income. What is your income? How high is it? The higher your income, the higher the potential for tax savings.

Number two, consider your home size. If you were to make a move, would you be downsizing your home? Would you be upsizing your home or would you be making a lateral transfer much like we did? And if the answer is upgrading or upsizing your home, just remember you may be paying additional property tax, insurance and maintenance costs, which would eat into your potential tax savings.

Number three, consider your employment options. Could you get a transfer with your company or job? Do you work from home? Could you potentially find a new job? in a zero tax state and make more income. All of these are gonna be dependent on you.

So let's examine a quick case study to help paint the picture. And we'll use Bob as our example. And Bob's an active income earner making $200,000 per year currently residing in Georgia and also currently working from home with the added flexibility to make a potential move. So if Bob decided to move just one state away, let's say down to Florida, He might be able to save $11,500 per year in state income taxes. Now, the second factor would be what Bob decides to do about the home he lives in. Would he make a lateral transfer to a very comparable home? In which case he's probably going to see elevated property taxes and elevated insurance costs, but he still might be able to walk away with some savings every year. Would he upsize his house to something larger? In which case he might forfeit all of the tax savings potentially, or would he downsize his home, in which case this might make a lot of sense for Bob, taking $11,500 every single year that he would otherwise be leaving on the table. If we change up the factor of income, and we say that Bob actually makes a million dollars per year in active income, this may make a lot of sense to make a move like this, because now he'd be saving potentially, $57,500 per year, which could more than offset the costs of the move. And he would continue with those savings year over year.

So in recent years, we've seen a massive inward migration to zero tax states and the sunbelt states in general. The pandemic has only accelerated that. And what we're inevitably going to see as a normalization where home prices become a lot more elevated in these zero tax states, but as a trade-off, you don't have. the state income tax. Now the states that are losing population year over year called negative migration will begin to run incentives to get people to come back, either by lowering their state income tax or shifting the taxes around to other places, or in some cases giving incentives or tax breaks to companies to relocate people and jobs to their state. But right now we're in the midst of a major shakeup here in this country. And the question is, should you move to a zero tax state?

You're listening to Passive Investor Tips. I'm your host, Travis Watts. Hope you found some value in this very short episode. If I can ever be a resource or mentor, please reach out at Passive Investor Tips on Instagram and Facebook or Travis Watts on LinkedIn, BiggerPockets and other social media platforms. Have a Best Ever a week. We'll see you in the next episode. 

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