What You Should Know about the Government’s Effect on Real Estate When Investing

By Eric Tyson

It’s important to understand the government’s effect on real estate if you plan on investing. This country offers many examples of the importance of state and local government on prospects for prosperity. The following are key governmental and quasi-governmental factors to consider when researching a prospective community in which to invest:

  • Tax considerations: For decades, California had an unbeatable combination of great weather and job growth that attracted millions from around the world. Over the past decade and with no end in sight, California has suffered from a declining economy and what some real estate investors and business owners feel is excessive government regulation and taxation. After the recall of Governor Gray Davis in 2003 and the election of Arnold Schwarzenegger, there was a lot of reason for Californians to be optimistic.

Unfortunately, the subsequent years, under Governor Jerry Brown and his super majority in the state legislature, have seen an ever-increasing litany of pro-tenant, anti-investment, job-killing legislation policies that offset many of the natural attributes of California and are being exploited by other Western states.

California real estate investors and others with means are establishing legal residency in Nevada, Texas, Washington, Florida, and other states without state income taxes in increasing numbers. Many states (such as Colorado, Illinois, Indiana, Massachusetts, and North Carolina) have established flat rate taxes whereas other states (like Kansas, Ohio, and Wisconsin) lowered their state income taxes. Of course, local taxes can be a factor for real estate investors as well.

So relocating your place of legal residence can make a significant improvement in your overall income tax liability, and it may not even be that much of a sacrifice. For example, a California real estate syndicator found that living on the east side of beautiful Lake Tahoe (in the state of Nevada) was just as nice as the west (or California) side, where the top income tax rate can add up to another 13.3+ percent in addition to the federal income tax.

You should also have a detailed understanding of the property taxation system and appeals process. Be sure to determine whether a proposed income property acquisition is in a special assessment district where additional taxes are assessed against properties. Such special assessment districts may offer some advantages like better schools, parks, and fire and police services and may be well worth the additional annual investment. But you should know in advance how much the additional costs will be, how long you’ll be required to participate, and exactly what you’re getting in return so you can properly evaluate whether you’ll be able to generate a commensurate increase in your rental income.

  • Economic development incentives: The economic development groups for many of these states are advertising in business publications and major newspapers and aggressively encouraging employers to relocate with incredible real estate incentives such as virtually free land or lower property and/or income taxation. Besides lucrative offers of real estate and tax incentives, as the global economy becomes ever more competitive, businesses are being lured to locations that can reduce their costs of labor, energy, and transportation.
  • Community’s reputation: Your local chamber of commerce, tourism bureau, and city hall all work very hard to establish the right reputation and attract the top employers. These organizations can have a real impact on the market environment for businesses and thus create more jobs in the long run, which leads to increased population and higher demand for all types of real estate.
  • Business-friendly environment: You can’t underestimate the importance of a probusiness attitude among state, regional, and local governments to help create a vibrant economy where your real estate investments can prosper.