As host of the Real Estate Tax Playbook, I frequently encounter confusion around the concept of "nexus" and its implications for real estate investors. In a recent conversation with Rich Hedley, our state and local tax leader at Brown Edwards, we dove deep into this critical topic that every real estate professional needs to understand.
What is Nexus?
Nexus can seem like a nebulous concept, and frankly, it's sometimes unclear even to the states themselves since different jurisdictions have varying laws governing nexus. At its core, nexus represents a connection between you as a taxpayer and a taxing jurisdiction (the state). There must be a sufficient enough connection with the state for that state to impose tax on you.
The key phrase here is "sufficient enough to impose a tax," and this is where states differ significantly in their requirements. This variation is exactly why you need a knowledgeable tax advisor to help identify which states you might be operating in that could create nexus obligations.
Nexus in Real Estate: Keeping It Simple
Fortunately for our real estate professional listeners, nexus is relatively straightforward in the rental real estate context. Physical presence is what matters most, and we're talking about people and property. From a rental real estate perspective, we're primarily concerned with property.
Here's the simple rule: The state where your rental property is located will be the state that taxes that property. If you own property in a state, it's going to create nexus, and there will likely be an income tax filing requirement in that state (assuming they have an income tax).
Physical presence will always create nexus for you. There isn't a state out there that doesn't recognize physical presence as creating nexus. Where things get more complicated is with other types of businesses like manufacturing and retail that ship products to other states and generate sales without physical presence—but that's typically not our concern in real estate.
When You Need Professional Help
While the basic principle is straightforward, the application can become complex, especially when you're dealing with multiple properties across different states. Many manufacturers and other businesses that also own real estate face additional complexities that require professional analysis.
This is where nexus studies become valuable. At Brown Edwards, we offer nexus studies as a service to help businesses operating in multiple states identify where they need to file and, just as importantly, where they don't need to file. Not having proper nexus analysis may result in filing in more states than necessary or not filing in enough states—neither scenario is ideal.
A nexus study doesn't always have to be a full-blown comprehensive analysis. Even a basic nexus analysis can provide tremendous value for businesses operating across state lines. The goal is to ensure you're compliant where you need to be without over-filing in states where you don't have sufficient connection.
The Bottom Line
Understanding nexus is fundamental to proper state tax compliance. For real estate investors, the rule is generally straightforward: own property in a state, and you'll likely have filing obligations there. However, as your real estate portfolio grows across state lines, or if you have other business activities, the analysis becomes more nuanced.
Don't let nexus confusion lead to non-compliance or over-compliance. Both scenarios can be costly. Work with experienced tax professionals who understand the varying state requirements and can help you navigate this landscape efficiently.
Remember, getting nexus right from the start is much easier than dealing with compliance issues down the road. If you have questions about your nexus obligations, it's always better to address them proactively rather than reactively.
• 25 min
State Tax Nexus and Multi-State Real Estate: What You Need to Know
Real Estate Tax Playbook
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