Where to move for lower taxes (check out this study)

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One way of saving a ton of money is to move to a low-tax area when you buy a home. If you’re wondering where to move for lower taxes, consider that you may be paying:

• State and local income taxes
• Property taxes
• Sales taxes

One way or another, you’re taxed at the federal, state, county and city levels. This article tells you where high taxes are chasing people away, and where homeowners are heading.

Study provides clues about where to move for lower taxes

A new report from Redfin shows there’s a growing trend of people moving out of high-tax markets and into lower-tax markets. Part of the reason may be that tax legislation, passed last year by Congress, created a greater tax burden for many of these folks; new tax laws cap mortgage interest and state and local tax deductions.

Related: How the 2017 tax bill affects homeowners and home buyers

Redfin ranked the top 10 high-tax metros by net outflow of users and their top destinations:

1. San Francisco—27,849/16,745 (net outflow in 2^nd quarter 2018 vs. 2017); Sacramento/Seattle (top destination vs. top out-of-state destination)
2. New York City—23,559/15,644; Boston
3. Los Angeles—13,370/13,109; San Diego/Phoenix
4. Washington, D.C.—5,900/5,499; Philadelphia
5. Chicago—3,428/2,366; Phoenix
6. Denver—3,007/338; Colorado Springs/Seattle
7. Milwaukee—787/226; Chicago
8. Houston—336/317; Austin, Texas/Chicago
9. Eugene, Ore.—288/-201; Portland, Ore./Seattle
10. Detroit—263/309; Chicago/Chicago

Redfin revealed that the average local tax burden was three times lower in the top-10 migration destinations listed above than in the 10 markets people are most commonly departing. The average local tax burden is a relative measure of a county’s average sales, income, and property tax rates.

Where to move for lower taxes

Redfin also ranked the top 10 lower-tax metros by net inflow of users and their top origins:

1. Phoenix—6,349/3,849 (net inflow in 2^nd quarter 2018 vs. 2017); Los Angeles (top origin vs. top out-of-state origin)
2. Sacramento—6,208/4,833; San Francisco/Seattle
3. Atlanta—5,111/2,767; New York City
4. Las Vegas—3,786/3,509; Los Angeles
5. Portland, Ore.—3,614/1,190; San Francisco
6. Austin, Texas—3,212/1,655; San Francisco
7. Dallas—2,979/2,036; Los Angeles
8. Miami—2,575; 1,746; New York City
9. San Diego—2,537/5,286; Los Angeles/Seattle
10. Nashville—2,462/1,364; New York City

Redfin surveyed buyers and found that:

• 8 percent shifted their search to a state with lower taxes because of the new tax law
• 9 percent shifted their search to nearby cities with lower taxes
• 10 percent bought a cheaper home due to the decreased benefits on high-priced homes
• 10 percent bought a costlier home because their after-tax income grew

While taxes are important, they clearly are not the only consideration for most buyers.

How to interpret the data

Alina Ptaszynski, spokesperson for Redfin, says these findings were telling.

“Prior to tax reform, we were already seeing migration away from expensive metros to more affordable metros. But tax reform further accelerated that trend,” she says.

Along with affordability and taxes, “low unemployment plays a role. The labor market is tight, and employers are having trouble finding skilled people. That means it’s easier for people to find a job in another city.”

Related: Rising mortgage rates affect home affordability, but less than you think

Ptaszynski noted that some people who migrated have the potential to save thousands a year in income, property, and state/local taxes.

“One popular migration route is Los Angeles to Las Vegas,” she says. “In Las Vegas, the typical homeowner pays $1,500—or 0.8 percent—in property taxes. And they pay about eight percent in local sales taxes but no state income tax.

“But in Los Angeles, they’ll pay, on average, $3,600 in property taxes, about a nine percent sales tax rate, and an eight percent income tax rate.”

Moving makes sense to many

Real estate attorney and Florida International University instructor Suzanne Hollander isn’t surprised that many people are researching where to move for lower taxes.

“With the new tax laws, you can’t deduct much state income tax anymore. So it makes sense to consider moving to a state with no income tax. Also, the new tax laws have a limit on how much real estate tax you can deduct. So moving to a state with a lower tax rate may be smart, too,” Hollander says.

For instance, “Many seek to establish residency in the state of Florida. That’s because it does not have a state income tax or state estate tax,” Hollander adds.

What to consider before moving

Taking advantage of lower taxes isn’t the only reason to ponder a move. Weigh other factors, too, before deciding where to move for lower taxes.

“Consider the cost of housing, the overall cost of living and the job market in your next destination,” Ptaszynski suggests. “Also think about proximity to family, recreational opportunities and climate. And give thought to transportation options and the city’s cultural and political climate as well.”

Related: Homebuying tips (how to choose your neighborhood)

In addition, consider the costs of selling, buying and moving.

“Say you expect to save $10,000 a year in taxes if you move. That sounds like big savings, but look closer at the costs of that move,” cautions real estate attorney Elizabeth A. Whitman.

Case in point—say your home for sale fetches $500,000. Whitman says the costs to sell, buy and move from that could add up quickly. This is especially true if you had to vacate your old home and rent for a spell before moving into your new digs. In her scenario, here’s what you could end up paying:

• $35,000—real estate commission and closing costs on sale
• $8,000—interstate moving costs
• $2,000—closing and mortgage costs on new home
• $500—temporary storage of belongings
• $1,800—two months’ rent in temporary housing
• $47,300—total

“It would take almost five years of tax savings to recoup these costs,” says Whitman.