Taxes in Nevada vs California, and How They Affect Your Vacation Rental
Lake Tahoe has long been a tale of two cities. There are the vacation homes that are frequented by their owners, who stay anywhere from a few weeks out of the year to months at a time. Often, these owners rent out their home when it's not in use to cover mortgage costs or keep up with maintenance on the home. Then there are those who purchase a Lake Tahoe investment property strictly for the potential of profit, and rarely - if ever - visit the home. Generally speaking, these investors typically strive for a 10% return on their investment.
Whichever bucket you fall into, there's one thread that undoubtedly runs through both approaches: The difference in taxes between California and Nevada. In this post, we'll look at those differences to help you decide which side of the lake best suits what you're hoping to get out of your Lake Tahoe vacation home.
Remember though: Where you buy a vacation home in Lake Tahoe may depend on much more than just taxes and cost savings. There are several personal factors to consider, which we cover in our post here.
Nevada has no tax on income of any kind -- including retirement income -- and does not impose an estate tax. This is a far cry from California, where the highest earners pay 13.3 percent of their income to the state on top of federal taxes. While at this point California also doesn’t collect an estate tax, there have been talks of instituting something similar in recent years.
Establishing residency in Nevada requires, at the very least, living in the state for at least 183 days out of the year. To attain “domiciled” status, you’ll need to pass a “Close Connection Test,” which looks into what ties you have with Nevada. A few of these determinants include:
The property tax situation is slightly more convoluted than the income tax environment, but overall, purchasing a vacation rental investment property is still more advantageous in Nevada than California -- if you know where to buy.
In California, property taxes are reassessed every time a transfer occurs, at 1.25% of the purchase price. In Nevada, property taxes are established by the county, and rates are reassessed every five years throughout the state. There are only two Nevada counties that border Lake Tahoe: Washoe County and Douglas County.
Washoe County extends from the California border in the north down to about Marlette Lake on the east side of Lake Tahoe. Here, in neighborhoods like Incline Village, you’ll see high real estate prices, as well as increasingly higher property taxes that are currently verging close to those seen across the border in California.
In South Lake Tahoe, the situation is different, and the benefits of living in Nevada (and renting out your home here) start to become apparent. Douglas County’s current average property tax rate is .719% of the assessed home value. So a $1M home in South Lake Tahoe would see annual property taxes of $7,190. That same home in California would result in an annual property tax of $12,250 - more than 70% higher.
So from a tax standpoint, the savings generated from lower property taxes in South Lake Tahoe, as well as paying zero taxes on your rental income if you live in Nevada for 183 days or more per year, are certainly enticing.
However, as we mentioned above, taxes are only one part of the decision-making process regarding where to buy a vacation home in Lake Tahoe. Other non-financial considerations include:
To learn more about the best places to invest in a vacation rental property in Lake Tahoe, get in touch with our owner consultants today, who are standing by to answer all your questions.
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