Yet Another Reason to Choose the SW Washington Coast

Washington State has very favorable taxes for retired people on a fixed income. In fact our tax situation is far better than the other two Pacific Coast States. The coast offers a mild climate that is warmer in the winter and cooler in the summer compared to the Washington State interior. But that lack of an income tax is a big benefit to all residents and in particular, retirees. The blog post below talks a bit about it.

Originaly published on Retire to Washington, April 23, 2019 by Rod Sager

Let's look at why an income tax is more of a killer than a sales tax especially for retirees. Retirees often do not have many tax deductions or exemptions. So a retired couple earning a taxable household income of 35,000 will pay about $3150 in Oregon State income tax. Contrast that with the a typical annual sales tax paid in Washington at $1200.

Sales tax is something you only pay when you buy a taxable item. In Washington food for example is not subject to sales tax. An income tax is levied before you receive your net check. You are going to pay it whether you buy things or not. Sales tax is almost always a lower expense than income tax with the notable exception of being poor. Those in Oregon who have a taxable income of $0 will not pay any income tax, obviously. But in Washington a person with a taxable income of $0 will still need to buy things and some of those things will be subject to sales tax.

Please take note I am using taxable income, because retirees are not subject to income taxes on a sizable portion of their Social Security, ROTH IRA's are tax free, and standard exemptions and deductions reduce taxable income. So someone earning $20,000 could in fact have a taxable income of $0.

So the rule of thumb is, if you are poor live, in Oregon, if you are middle or upper income, move to Washington. Well it isn't always quite that simple, but that simple solution is not to far from reality in actuality.

So in case you needed another reason to move to the coast, there it is, taxes in Washington and better than Oregon.

Rental and Vacations Homes at the Beach

If you have spent any time reading this blog, you know I have made it abundantly clear that the Long Beach Peninsula is the real estate value of the whole Northwest Coast Line from Brookings, OR to Port Angeles, WA.

So let's say you buy a vacation home at the beach. How does this set with your tax man. First before I write another word on taxes : DISCLAIMER ALERT! I am not a tax professional and am not advising anyone on specific tax matters. Before making any decisions about taxation and its implications on your personal finances, be sure to consult your tax professional.

OK so the IRS has some weird rules regard vacation or second homes and rental properties. Many people figure they will rent out their beach house to others when they are not using it to help pay the costs of ownership. This is fine but depending on how often you rent it, it could change the tax status of the property.

The IRS deals with second homes differently than it does rental properties. If someone buys a second home and they use it exclusively for their own purpose, ie. they do not rent it out, then the IRS allows under current tax law the owner to deduct the mortgage interest up to the limits, currently at a maximum mortgage amount of $1,000,000.

Interestingly according to tax pros, the IRS doesn't care if you rent the second home out so long as it is not more than 14 days in a calendar year. Even if you rented it out for a high weekly rate, so long as it never exceeds 14 days in a calendar year, you are not required to report it. The home remains a second home.

If the house is rented more than 14 days per year it is no longer a second home and is treated differently under IRS rules. It becomes a rental property and it may actually be better in the end but it will become more complicated as the expenses and depreciated are now taken into consideration, checked against the rental income earned, now required to be reported and appropriate taxes paid.

If the rental home loses money, ie expenses are greater than income, this can provide a shelter from taxation for the owner's annual tax bill. However, when the home is sold in the future there will likely be a large capital gain that could hit the home owner hard.

The IRS tax code is a complicated animal and this is why a good CPA that specializes in individual income tax service is indispensable. The whole point of this article is that great deals at the coast aside, owning a beach house either as an investment or second home can be even more affordable that just the price and mortgage payment would indicate. Talk to your banker and your tax pro and see just how affordable that beach house can be. The talk to your local real estate pro and see what's out there.