The Tax Advantages Of Investing In Florida Real Estate
The most basic principle of real estate is, of course, location, location, location! When it comes to investing in real estate, there are so many factors to take into account: cost of living and overall life quality in the area, market stability and longevity, renting versus owning, and more. Perhaps one of the most important things to consider is taxes! And when it comes to those, the state of Florida is hard to beat. Florida has long been a wise choice when it comes to real estate, and the numerous tax benefits are a large part of why. Read on to see why investing in the Sunshine State may be a great next move for you.
The benefits of Florida tax law for real estate
In October 2019, real estate powerhouse Zillow ranked the Florida real estate market as “very hot,” and its experts predict that home values there will rise 7% over the next year alone. The many tax advantages available to savvy investors combined with the state’s steady growth make Florida a no-brainer.
No personal income tax
Florida is one of just seven states in the country that does not impose a personal state income tax on its residents. Nor do individual cities in Florida impose city taxes on income. In contrast, high tax states, such as California, levy up to 12% state tax on their residents. These significant extra taxes disappear when a resident moves to Florida. It’s no wonder wealthy people with disposable income from all over the U.S. are flocking to South Florida for longer than just the winter. New Yorkers, in particular, are moving to Florida faster than ever before, especially as the coronavirus pandemic has taken hold.
Because telecommuting is becoming the norm, many working people who might previously have spent a few months a year in Florida are moving there permanently to save a pretty penny on income taxes. Don’t forget that Social Security benefits, retirement, and pension plans are all considered income, so those aren’t taxed at the state level either, making Florida the favorite choice among retirees. And all those people are going to need somewhere to live, aren’t they?
No capital gains tax
Florida also has no state tax on capital gains. Capital gains are defined as the value difference between the initial purchase price of a home and the subsequent sale price. Florida residents only have to worry about the federal capital gains tax, and if the property is a primary residence, they are eligible for a federal exemption of $500,000 (for joint filing) or $250,000 (individual), just as long as they have physically lived there for at least two of the past five years. In some specific circumstances, sellers who transfer the money from that sale directly into another investment property with a 1031 exchange can skip the capital gains tax entirely.
No estate tax
Florida got rid of its estate tax way back in 2004. It joins the majority of the country here, as only 14 states currently have one. An estate tax, also commonly referred to as the “death tax,” is a tax on any property that someone who has died bequeaths to someone else.
The property can be in a few different forms, including stocks, cash, and of course, real estate. Estate tax is often confused with inheritance tax; those are taxes imposed on an individual portion of the overall estate, while estate tax deals with the entire estate. The advantage of no estate tax is obvious to Florida real estate investors.
Property Taxes reduced for Homestead Exemption
When owning Florida real estate, bona fide Florida residents receive a $25,000 exemption for their primary residence under the Homestead Exemption Act. While Florida residents still pay property taxes, if one has a Homestead Exemption, the assessed value is reduced by $25,000 before the tax is calculated. The major benefit of a Homestead Exemption, however, is that it caps property tax increases. It also will protect one’s home from creditors in bankruptcy proceedings.
The Tax Cuts and Jobs Act of 2017 included some of the biggest changes to U.S. taxes in decades. One of the most important parts of the TCJA pertaining to Florida was the creation of Opportunity Zones, tax incentives designed to attract wealthy investors to poor and rural areas. Investments in these zones will fuel positive economic development in areas that would otherwise be left behind. Benefits for these investors include the ability to temporarily defer paying capital gains taxes on existing assets and permanent exemption from capital gains taxes on any Opportunity Zone properties owned for at least ten years. As of 2019, Florida has over 400 Opportunity Zones.
Even more tax advantages
Taxes are far from the only reason that real estate investors should focus on Florida. From having a strong rental economy and reasonable housing prices to being a nationwide leader in steady growth, it’s safe to say that there are more pros than cons to investing in Florida’s future.
Generous Rental Write-Offs
Rental homes in Florida are in demand with no signs of slowing down, with a whopping 30% rent increase rate from 2011 to 2020. More and more people are choosing to rent, and ownership has fallen below 50% in many of Florida’s biggest metropolitan areas.
Unlike many other types of investments, real estate generally appreciates in value, and it turns out that basically, every penny you spend to maintain a rental property is tax-deductible. You name it, you can probably write it off in Florida - insurance, advertising, cleaning/maintenance, homeowner’s association fees, and of course, real estate taxes.
Strong Rental Economy
The home rental market in Florida is experiencing rapid growth with no end in sight. The median rent is higher than the national average, with renters willing to pay more for every option from a studio apartment to a multi-bedroom house.
Because of its tax benefits and mild climate, Florida has a high percentage of retired renters, and those folks tend to make great tenants due to their steady income and willingness to stay in one property for a lot longer than their younger counterparts. Given that the percentage of homeownership in Florida isn’t as high as it once was, owning a rental property for long-term tenants or even vacationers is a great investment option.
Stable Housing Market with Easy Entry
Low mortgage rates and other homeownership factors are helping Florida’s market achieve steady growth, even as markets in other parts of the nation are floundering. Home sales between September 2018-2019 jumped 11.5%. Fewer homes than the national average have negative equity, and impressively, homes spend less than 90 days on the market. And if you own the home, there’s no shortage of ways you can add value to it over time.
While property taxes in Florida are higher than in some other states, homeowners can take advantage of the Homestead Exemption Act, which gives established residents a $25,000 reduction on their property tax. So whether you’re leaning toward rental property or ownership, Florida should be on your radar.
Growing Economy (Even During A Pandemic)
The coronavirus pandemic has changed our lives in countless ways we could never have anticipated. Of course, it’s greatly reduced the amount of travel by plane to tourism-driven locations like Florida. Yet, some areas of Florida are affected mildly by Covid because most of the tourists drive to locations like Destin, Watersound, and Grayton Beach. But when the pandemic eases its grip, tourists are going to be more than ready to resume their vacations, and Florida is poised to be part of a roaring comeback for the travel industry. Investing in a home or rental now and having it ready for vacationers is a smart move.
One of the strongest demographics in Florida travelers is snowbirds, or a typically older, retired group of people who live primarily in the north but escape to Florida annually during the colder winter months. A recent study by the University of Florida found that about 800,000 snowbirds migrate south to the Sunshine State every year. So-called “snowbird rentals” are a solid investment due to their almost guaranteed high stream of income during at least half the year.
Living Where Others Vacation
Florida’s combination of natural beauty (over 600 miles of beaches!), year-round temperate climate, and an endless variety of things to do have always made it a popular place to live. The weather boasts an average high of 81 degrees in the summer and an average low of 60 in the winter.
Golf enthusiasts (many of them snowbirds) can choose from over 1,300 courses, the most in the country. Families can enjoy world-class theme parks including Walt Disney World and Universal Studios.
Florida has three professional football teams, two professional baseball teams, two professional basketball teams, and two professional hockey teams, so sports fans will never be bored.
Nature lovers can explore coastal dune lakes in South Walton Beach. These coastal dune lakes only exist around 30a in South Walton Beach, Madagascar, and New Zealand. It’s no wonder that over 1,000 people move to this incredible state every day. Shouldn’t you be cashing in on your piece of Key Lime pie?
Additional real estate resources
Bill Gassett shows the readers of this blog everything they need to know about tax deductions when buying a house. From renewable energy upgrades to home improvement loan interest, you will come across some great tax tips and Bill's article.
About the author
Anthony Guerriero, MBA CPA is the co-founder and Managing Partner of Manhattan Miami Real Estate. His firm helps clients all over the globe invest in luxury properties in NYC and Miami, and has been featured on Inman, Realtor Magazine, and NextAdvisor.
I didn't have enough knowledge of tax benefits available for investors. Thankfully, I landed on your blog and it equipped me with the right knowledge to know everything about property tax benefits.
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