Do I pay state tax on a 1031 exchange in any of these states?

No, none of the 9 no-income-tax states impose state tax on 1031 like-kind exchanges (since they have no state income tax to defer). Federal 1031 rules still apply: the exchange must be of like-kind real property held for investment or business, not personal-use property; the replacement property must be identified within 45 days and acquired within 180 days; certain 'boot' (cash or other non-like-kind property received) is taxable. State-level reporting may still be required in certain states for tracking purposes.

Home/Best for Passive Income

RANKED · INVESTORS

UPDATED MAY 2026

Best no-income-tax state for passive income

Q: Did New Hampshire really repeal its dividend tax?

Yes. New Hampshire's Interest and Dividends Tax (RSA 77) was 5 percent for 2022, then 4 percent for 2023 and 3 percent for 2024. The original HB 2 (2021) schedule targeted a full sunset in 2027, but the 2023 state budget accelerated full repeal to January 1, 2025, so the 2 percent and 1 percent years never took effect. As of tax year 2025 the rate is zero, and New Hampshire has joined the 8 other no-income-tax states with zero tax on investment income.

Q: Is rental income taxed at the state level in the 9 no-income-tax states?

Generally no. Rental income flows through to the owner's personal return and faces zero state tax in all 9 no-income-tax states (NH's former dividend tax was repealed effective January 1, 2025, and rental income was treated as ordinary rather than as interest/dividend, so it was exempt throughout in any case). Note: Florida, Tennessee, and Texas may apply local property tax on rental properties; Florida charges Tourist Development Tax on short-term rentals (vacation rentals); some Florida counties tax homeowners' associations and special-district fees. Washington applies B&O tax on rental businesses if structured as a business entity.

Q: Which state is best for someone living off investment income?

For pure investment-income retirees, Florida and Wyoming are the top picks. Florida combines zero state income tax, zero state capital gains tax, no estate or inheritance tax, the Save Our Homes property tax cap, and deep wealth-management infrastructure. Wyoming has the lowest total tax burden in the country and complete absence of investment-income taxes. South Dakota is a strong third for trust integration. Avoid Washington if your annual realised capital gains will exceed the standard deduction ($278,000 for 2025), because the state capital gains tax applies above that threshold (7 percent, and 9.9 percent on the portion above $1 million).

For investors and households living substantially on capital gains, dividends, interest, and rental income, the right no-income-tax state can save tens or hundreds of thousands per year. Eight of the 9 are clean: zero state tax on all investment income. The exception is Washington, which enacted a capital gains tax in 2022 above a standard deduction ($278,000 for 2025), now 7 percent and 9.9 percent on taxable gains above $1 million. New Hampshire's tail-end dividend tax was repealed effective January 1, 2025. Here is the honest investor's ranking.

Sources: state revenue departments, RCW 82.87 (WA capital gains), NH RSA 77 (Interest and Dividends Tax), Tax Foundation 2024.

§ I · The Investment-Tax Map

Capital gains, dividends, interest, rental: the 9-state map

State	Capital gains	Dividends	Interest	Rental income	State estate tax
Alaska	0%	0%	0%	0%	None
Florida	0%	0%	0%	0%	None
Nevada	0%	0%	0%	0%	None
New Hampshire	0%	0% (I&D repealed 2025)	0% (I&D repealed 2025)	0%	None
South Dakota	0%	0%	0%	0%	None
Tennessee	0%	0% (Hall repealed 2021)	0%	0%	None
Texas	0%	0%	0%	0%	None
Washington	7% above $278K, 9.9% over $1M	0%	0%	0% (B&O if business)	Yes ($3M exempt; up to 35% through Jun 2026, then 20%)
Wyoming	0%	0%	0%	0%	None

§ II · The Washington Catch

Washington's capital gains tax: when it bites

Washington enacted its capital gains tax under SB 5096 in 2021, taking effect 1 January 2022. The Washington Supreme Court upheld the tax in Quinn v. Washington (March 2023) on a 7 to 2 ruling, characterising it as an excise tax on the privilege of selling assets rather than a constitutionally prohibited income tax. The technical mechanism matters because Washington's Constitution prohibits a graduated personal income tax (Article VII, Section 1), but the Court held that the capital gains tax is structurally an excise rather than an income tax.

The tax applies to long-term capital gains above an annual standard deduction, indexed for inflation and equal to $278,000 for 2025 (one combined amount per individual or married couple, not doubled for joint filers). Standard exclusions: real estate gains are entirely excluded (regardless of size); retirement account gains are entirely excluded; gains from sale of qualified family-owned small businesses can be partially deducted; livestock sold for breeding or dairy is excluded. Stock gains, bond gains, ETF gains, mutual fund gains, and non-real-estate investment gains are within scope.

For an investor with $1 million of long-term gains in a year, the Washington tax is about 7 percent of $722,000 ($1M minus the $278K deduction) = roughly $50,500. The same gain in any of the other 8 no-income-tax states is zero. For someone with concentrated equity exposure, a multi-year stock-vesting cliff, or a single-year liquidity event from $5M to $50M, Washington could cost several hundred thousand to several million in state tax (the 9.9 percent surtax applies to taxable gains above $1 million) that the other 8 states would not charge. Washington also has a state estate tax (RCW 83.100, $3M exemption since July 1, 2025; top rate 35 percent for deaths through June 30, 2026, reverting to 20 percent thereafter), the only one of the 9 to do so. For passive-income investors, Washington is materially worse than the other 8 no-income-tax states.

§ III · NH Tail Tax Repealed

New Hampshire repealed its Interest and Dividends Tax on January 1, 2025

New Hampshire historically taxed interest and dividend income above $2,400 single / $4,800 joint at a flat 5 percent rate (RSA 77). Wages, salary, and capital gains were never taxed. HB 2 (2021) set a phase-out (5 percent for 2022, 4 percent for 2023, 3 percent for 2024) originally scheduled to reach zero in 2027, but the 2023 state budget accelerated full repeal to January 1, 2025. The 2 percent and 1 percent years never took effect.

As of tax year 2025, the NH Interest and Dividends Tax is zero. A retiree with $80,000 of dividend income now owes no New Hampshire tax on it. New Hampshire has joined the 8 other no-income-tax states with a complete absence of any tax on personal income (wages, dividends, interest, capital gains, rental income, retirement income, all zero state tax).

For passive-income investors, the former NH tail tax is no longer a concern. Property tax remains the dominant NH tax (1.86 percent average, fourth highest in the nation), so NH attractiveness depends on home value choice. For investors with significant dividend income but moderate home value, NH is now effectively tax-free for income purposes.

§ IV · Real Estate / Rental Income

Real estate rental income: how the 9 differ

Net rental income is treated as ordinary personal income at the federal level. In all 9 no-income-tax states, the personal-side state tax on rental income is zero. The differences appear in three secondary areas: short-term rental taxes (Florida and Nevada specifically), business-entity-level taxes (Washington B&O, Tennessee F&E), and property tax that applies to the rental property itself.

Florida's Tourist Development Tax applies to short-term rentals (under 6 months) at 2 to 6 percent depending on county, on top of the 6 percent state sales tax. A Miami-Dade vacation rental therefore charges roughly 13 percent total tax on rental receipts. The owner is responsible for collection and remittance. For long-term rentals (over 6 months), Florida charges no Tourist Development Tax and no sales tax.

Washington applies the B&O tax to rental activity if structured as a business entity. The B&O on rental real estate is generally 0.484 percent of gross rental receipts (services classification). For a $500K-revenue rental portfolio, this is $2,420 per year in B&O on top of property tax. Tennessee applies the Franchise & Excise Tax to rental LLCs with significant assets; a small rental LLC may face $250 minimum franchise tax annually.

For a passive investor holding 5 to 10 long-term rental properties through an LLC, the cleanest no-tax states are Wyoming, South Dakota, Florida, Texas, and Nevada. All exempt rental income at both personal and entity levels (Texas under the franchise threshold). The owner can be domiciled in any of these states or in a different state; rental income is sourced to the property location, but the owner's state of residence does not impose its own income tax (in the no-tax states).

§ V · Three Investor Profiles

Three investor profiles, three best states

Profile A: $5M brokerage portfolio, $200K annual realised gains

Best fit: Florida or Wyoming. Both fully exempt the $200K annual gains. Florida adds Save Our Homes property tax cap, deep wealth-management infrastructure, no estate tax (vs NY's $7.16M cliff). Wyoming has lowest total burden, strongest privacy. Texas and Nevada also work; Tennessee works (high sales tax is a small offset). Avoid Washington (the $200K is below the $278K capital gains deduction so the immediate tax is zero, but a single-year spike above $278K triggers the tax; the WA estate tax is the larger long-term concern).

Profile B: Tech founder anticipating $20M IPO liquidity

Best fit: Nevada, Florida, Texas, or Wyoming. All zero on the $20M gain. Nevada saves $2.66M vs CA, $1.4M vs WA. Pre-IPO move, with documented residency change at least 6 to 12 months before close, is essential. CA Franchise Tax Board scrutiny intense for moves followed by large gains. South Dakota dynasty trust can layer on top to preserve the post-tax wealth across generations without ongoing state-level trust income tax.

Profile C: Real estate investor, 12 rentals, $400K gross rents

Best fit: Florida, Texas, Wyoming. Cleanest pass-through treatment for rental LLC structure. Florida is most natural if rentals are FL-located; Texas and Wyoming work for nationwide portfolio. Avoid Washington if portfolio scale grows toward $1M+ revenue (B&O tax bite increases). Tennessee works but F&E tax adds 6.75 percent on net rental income at the entity level.

§ VI · Queries

Frequently asked

Q.01Which states have no tax on capital gains?

Eight of the nine no-income-tax states have zero state tax on capital gains: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming. The exception is Washington, which enacted a capital gains tax effective 2022 on long-term gains above an annual standard deduction ($278,000 for 2025), at 7 percent and 9.9 percent on the portion above $1 million.

Q.02Does Florida tax dividend income?

No. Florida has no state income tax of any kind, so dividend income, interest income, and capital gains are all completely exempt. Federal tax still applies to dividends and interest.

Q.03Did New Hampshire really repeal its dividend tax?

Yes. NH's Interest and Dividends Tax was 5 percent in 2022, then 4 percent in 2023 and 3 percent in 2024, and the 2023 state budget accelerated full repeal to January 1, 2025 (rather than the originally scheduled 2027). It is now zero.

Q.04Is rental income taxed at the state level in the 9 no-income-tax states?

Generally no on the personal side. Florida charges Tourist Development Tax on short-term rentals; Washington applies B&O tax on rental businesses; Tennessee applies Franchise & Excise Tax to rental LLCs with significant assets.

Q.05Which state is best for someone living off investment income?

Florida and Wyoming are the top picks. Florida combines zero income tax, zero capital gains, no estate tax, Save Our Homes cap, and deep wealth-management infrastructure. Wyoming has the lowest total burden. South Dakota is third for trust integration. Avoid Washington if annual realised gains exceed the $278K deduction (7%, and 9.9% above $1M).

Q.06Do I pay state tax on a 1031 exchange?

No, none of the 9 no-income-tax states impose state tax on 1031 like-kind exchanges (no income tax to defer). Federal 1031 rules still apply: like-kind real property held for investment, 45-day identification, 180-day acquisition.

Q.07Does South Dakota charge tax on trust income?

No. South Dakota has no state income tax on trust income regardless of where beneficiaries reside. Combined with no rule against perpetuities, this makes South Dakota the dominant trust-situs jurisdiction in the US (over $700 billion in trust assets).

§ VII · Related

Related dossiers

DETAIL

States with no capital gains tax

The 8 states, plus the WA catch in detail

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For high earners

$250K+ households: the income tax overwhelms everything

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For business owners

Pass-through, S-corp, C-corp ranked

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Best state to retire

Retirement income, healthcare, climate ranked

FILING

Washington: full filing

Capital gains tax, B&O, when to avoid for investors

FILING

New Hampshire: full filing

Interest and dividend tax repeal, property tax bite

Sources: Washington Department of Revenue (RCW 82.87, RCW 83.100), New Hampshire Department of Revenue Administration (RSA 77), Quinn v. Washington (2023), Florida Statutes 220.11, Texas Tax Code 171.0011, Tennessee Code 67-4. Tax Foundation State Business Tax Climate Index 2024. Last reviewed May 2026. Information is for educational purposes only and is not tax, financial, or legal advice. Consult a CPA before relocating or executing investment moves.