Avoiding State income Tax - Posted by James B

Posted by JHyre in Ohio on May 05, 1999 at 13:07:34:

with some solid, classic tax planning. A few things to watch for: This strategy is less likely to work in Illinois because it is a “water’s edge” jurisdiction. They will look at ALL related US companies and treat seperate companies- NV corps included- as one big company and tax it as one company (more or less- I won’t go into the gory details). That’s why I intimated at overseas corps- exactly the same strategy, but you need to use a foreign corp. This avoids “water’s edge” states’ taxes.

Other states use different means to counteract any such scheme. For example, Ohio does not allow interest deductions, so you have to find another way to get money out of an Ohio corporation (maybe consulting fees or the like).

Also, if the state is not a “water’s edge” state, I prefer Deleware over Nevada. First of all, NV’s reputation attracts auditors from state and federal government. In addition, many states have “clawback” provisions designed to “get back” income moved to states that have no income tax, like NV. DE got smart- they have an income tax, but it tends to exclude interest and other similar types of income. So the clawback fails, because DE has an income tax, but the type of income (e.g.- interest) coming in is not taxed by any state. As I mentioned in my post- it very much depends on the state you are in and the state to which you are “exporting” your income. Generalities- mine included- are dangerous because each state (and combinations therof) is unique. People like Bud or me can set you in the right direction, but taking your exact facts to a professional is strongly recommended.

As to Roths & the like- be sure your state recognizes them. Most do, some don’t. Roth IRA’s are WAY cool, as Bud suggests.

John Hyre

Avoiding State income Tax - Posted by James B

Posted by James B on May 05, 1999 at 09:54:52:

I live in Illinois. Let’s say I buy a property in Illinois or say, NW Indiana (which I am looking to do). Both states have a state income tax. Can I form a Nevada corporation as the entity to own my rental property? And since, Nevada has no state income tax, does this mean that I won’t have to pay state income tax on my rental income from my building that is in Illinois or Indiana?
James B.

Re: Avoiding State income Tax - Posted by Bud Branstetter

Posted by Bud Branstetter on May 05, 1999 at 11:11:19:

One approach to avoiding state income tax is making the money in state with a corporation. That corporation in turn has loans, expenses from the out of state(Nevada) corporation. The instate corporation therefore makes no profit and pays no state or federal tax. The Nevada corporation has no state income tax to pay, only Federal. It also has Fica, etc. to pay on that portion payed as salaries.

If you turned those rental properties into owner financed mortgages held in a limited partnership the income would pass to the owner without self employment tax.

If you shifted your investing to buy into a Roth IRA you could avoid state, self employment, federal income and all the rest of the taxes.

Nice try… - Posted by JHyre in Ohio

Posted by JHyre in Ohio on May 05, 1999 at 10:21:49:

but rental property will be taxed by the state that has “situs”- ie- the state in which the property is located. Your theory may work with intangible assets (notes!), depending on the state you live in AND the state in which the corp owning the notes is located. For a number of reasons, I tend to prefer Deleware over Nevada for these sorts of tranactions. In certain situations, foreign jurisdictions (Cayman Islands) are useful and legal.

John Hyre