Tax Planning Strategies for Multi-State Real Estate Investors

In today’s market, investing in real estate across state lines has become an increasingly accessible and effective way to build a diversified portfolio and tap into areas that show strong demand and potential for appreciation.

Real estate investors now own about 20 percent of the 86 million single-family homes and townhomes across the country. Of that share, only 1.2 percent is owned by institutional investors, while the majority—roughly 90 percent—is held by landlords with fewer than 11 properties.

As individual investors expand their footprint, the financial upside grows, but so do the new layers of tax exposure that come with it.

In this article, we’ll cover the main tax impacts and planning opportunities for investors with out-of-state properties, including:

• What the One Big Beautiful Bill Act (OBBBA) means for multi-state real estate portfolios
• How to choose the right entity structure for multi-state holdings
• How to coordinate estate planning strategies across states 

OBBBA Impact on Multi-State Real Estate Portfolios

The OBBBA, passed in July, introduced some of the most business-friendly tax provisions in recent years for rental property owners. Whether these carry through to each holding state, however, will depend.

• 100 Percent Bonus Depreciation: You can now deduct the full cost of eligible improvements, fixtures, and equipment in the year acquired and placed in service after Jan. 19, 2025. But not all states follow this rule. Investors may have to add back any federal bonus depreciation and use a separate depreciation schedule for states like California, New York, and Pennsylvania that do not conform.
   
• Section 179 Expensing: The OBBBA raised both the expensing limit and phaseout threshold for writing off qualifying property. To qualify, the property must be part of business activity conducted regularly and with a clear profit motive. Many states are friendlier to Section 179 than bonus depreciation, so this expensing tool may be more valuable, depending on where your property is held.
   
• Business Interest Deduction (Section 163(j)): The more generous “EBITDA” limit is restored, which add backs depreciation and amortization into the calculation and allows investors to deduct more interest in loans. Again, some states may not adopt this more favorable tax treatment, so your deductible interest could differ from state to state.
   
• Qualified Business Income Deduction: Section 199A was made permanent, allowing a 20% deduction for pass-through income with increased phase-ins raised to $75k for single filers and $150k for married filing jointly. There are only a few states that conform to this deduction, including Idaho and North Dakota.
   
• State and Local Tax (SALT) Deduction: You can now deduct up to $40,000 in property, sales, or income taxes paid to state and local governments if you itemize your deductions. However, 36 states and New York City have passed laws enabling qualifying residents to make Pass-Through Entity Tax (PTET) elections that offer a workaround to the cap and help maximize state and local tax deductions.
   
• Excess Business Loss (EBL) Limitation: The OBBBA makes the EBL limitation permanent, capping the amount of business losses that can offset non-business income each year. For multi-state real estate investors, this means that large depreciation or operating losses from one property may not fully offset gains elsewhere, deferring part of the deduction to future years.
   
• Like-Kind Exchanges: The OBBBA preserved 1031 exchanges but added tighter reporting and reinvestment timelines. Multi-state investors will now have more documentation requirements, especially where state conformity is different or replacement property is located across state lines. Noncompliance penalties are steep, so be sure to confirm rules between federal and state filings.
   
• Opportunity Zones: Recent updates extended the program’s investment window but introduced stricter rules around which projects and funds qualify. Investors should review eligibility closely and understand how long capital must stay invested to receive full deferral or exclusion benefits, especially when Opportunity Zone properties overlap with other state incentive areas.

Ultimately, the OBBBA gives real estate investors new ways to lower their taxes, but it’s important to look at both sides, both what the federal rules allow and how each state chooses to conform (or not) to them. 

Choosing the Right Entity Structure for Multi-State Holdings

Entity formation is a common talking point among advisors and investors, but it’s not a “set it and forget it” decision. Regular evaluation helps determine whether properties remain structured in the most efficient way possible. Why? Because how a business is structured directly impacts tax exposure and cash flow, and the laws that influence those outcomes are always changing. So, as tax codes and markets shift, a structure that worked well five years ago may not be the best option today.

While single-member LLCs are a common starting point to hold the property and protect personal assets, multi-state portfolios often require a two-tier setup, where each property has its own LLC and those LLCs together roll up into a central parent company. This structure could also create opportunities to manage self-employment exposure or optimize expense allocations.

That said, there’s no universal answer, as each situation is different and each state has its own set of rules. For example, some states charge annual franchise taxes—like California’s $800 fee—as well as registration or entity-level taxes for out-of-state businesses that operate there. For high-value portfolios, more advanced planning like qualifying for Real Estate Professional status could also materially affect after-tax profits.

Coordinating Estate Planning Strategies Across States

Sometimes owning property in more than one state can make estate planning a bit more complicated than one would expect. Even if the properties are well managed and well-structured under your ownership, what happens to those properties after you pass depends a lot on where they’re located.

If you own properties outright in multiple states, such as a condo in Florida and a rental property in New York, your executor may need to go through an ancillary probate process in each state to transfer ownership to your heirs.

One way to avoid the hassle of probate is through a revocable living trust. This strategy allows you to retain control over the assets while you’re still living but helps your heirs skip the probate process after you pass. Rather than having your executor file paperwork in every state where properties are held, transfers or sales can move forward without court involvement, which makes ownership transfers much more streamlined and less expensive for your heirs.

Depending on where the properties are held, state-level estate taxes could be due when you pass away. Even if you live in a state with no estate tax, like Arizona, you might still owe in one where your property is held, such as Oregon, New York, or Connecticut, all of which have their own estate tax systems to follow. 

Next Steps

Between recent tax law changes and a shifting housing market, there’s a lot of moving parts in real estate right now. Add in the challenge of managing different state tax rules, and it’s easy to see why this is a good time to review how your investments are structured and how those choices affect your overall tax picture.

Contact your R&A advisor at 520-881-4900 to discuss planning opportunities for your multi-state real estate portfolio.