We Introduce You to the ‘Almost’ No Property Tax States
Making money in real estate has what we consider its ups and downs. Its lows and highs. The pros and cons. One concept of investing in real estate that likes to feed on your cash is property tax.
Imagine a real estate world made of states with no property tax at all. One less money hungry cost for you as a real estate investor. Unfortunately, states without property tax do not exist. However, the real estate world does have some states that come close to being no property tax states. Here, we present you with the states with no property tax in 2018.
Defining Property Tax
Let’s take a look at what a real estate property tax even is. This tax pertains to real estate, which automatically means an effect on you as a real estate investor. The value of the tax is determined by taking into account the value of the property (which includes the land) you own.
Local or municipal governments then assess this value. Understanding what property tax is may be easy on the brain but not so easy on the pockets. States with no property tax benefit from one less tax payment.
Related: What You Need to Know About Real Estate Taxes as an Investor
Why Does It Exist
Purpose. It is only ideal for everything that exists to have a purpose. These property taxes are a major source of income for both federal and state governments. The investment property tax is mainly used by the local municipalities for repair and construction. This can include repairing streets, building bridges, schools, and the like. Other services include education, emergency services, transportation, libraries and parks, as well as a number of recreational activities.
You are a part of the state you live in. Therefore, you owe them those taxes to keep the area you’re investing in the nice area it started out to be. States with no property tax at all will probably lack the services your state municipalities provide you. Realistically, these taxes benefit you, even if it financially doesn’t feel like it. Giving away a chunk of your rental property income is unfortunate, but it can be worth it.
How Is Property Tax Determined
To put this section in more layman terms, your investment property taxes are determined by multiplying the property tax rate by the market value of your property. This value, of course, is recalculated by municipalities and presented to you in the form of a percentage.
A number of different boards and legislatures agree on the appropriate amount of tax revenue they will need to “keep the streets clean.” A hearing is scheduled and the budget (that is needed to cover expenses throughout the year without facing financial challenges) is decided on. Then, the cheapest property taxes in the USA are born.
How Does Property Tax Affect You and Your Property?
Property Tax and Real Estate Investors
When buying an investment property, it could be beneficial to invest in property tax free states. However, the majority of property owners like you are subject to the property tax rates determined by legislators. Normally, the municipality hires a tax assessor who basically goes around assigning the property tax rate to real estate investors like you. This is based on the market values at the time of assessment.
The payment schedule of when these taxes need to be paid differs from state to state. However, many local property tax codes give mechanisms property investment owners like you can formally context the property tax rate. A rental property tax is not completely avoidable, but it can be corrected and adjusted.
Related: Invest in Real Estate in These States with No Property Tax
Property Tax and your Property Investment
How is income from a rental property taxed? How is the tax rate on your investment property determined? Three methods can be used to find the suitable property tax rate.
The Property Valuation Method A property valuation is done by the assessor based on similar sales that have taken place in the area by using property market analysis. With this method, assessors look out for overpricing, underpricing, the location of your investment property, and the overall state of your investment property.
The Cost Method Here, the assessor determines the property value by how much it would cost to replace it. An older property would instead determine depreciation amount along with how much the property would be worth if it was empty.
The Income Method This is based on the income you make off the investment property if it was rented out.
States with No Property Tax
When you are looking for an investment property for sale, you consider a number of metrics. For example, if you use a tool like Mashvisor for real estate property analysis, you are provided with data on cash on cash return, cap rate, occupancy rate, and return on investment. All crucial metrics to take into account when buying an investment property.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice with Mashvisor, click here.
How low or how high property tax is in the state you are interested in is just as important. Lower property taxes could mean keeping a bit more rental income in your pocket. Here are the top states with no property tax provided to you with the help of WalletHub statistics:
Related: How to Buy Rental Property Out of State
Let’s Talk About Those Numbers
There is really no point in seeing numbers if there is no meaning or reasoning behind them. Here is a quick screening of the top 5 states with no real estate tax:
Although Hawaii has a low property tax, the state has the second-highest income taxes. This results in a high state tax burden in general. Leaders in Hawaii claim the overall burden as a factor contributing to the high prices and grim business environment. As a real estate investor, you should try to take all tax burdens into consideration, especially with states with no property taxes.
The low property tax rate in Alabama is due to the high sales tax rate. Alabama is one of few states that applies full sales taxes to things like groceries or over-the-counter meds. You win some, you lose some in this tax game. It seems like some states with no property tax make up for it with the use of other state taxes.
Related: 5 Risks That Come With a Rental Property and How to Mitigate Them
As you can see, Louisiana is considered one of the states with no property tax due to its low value of .51%. Although the state has favorable property tax rates, the state’s public education is suffering due to the lack of resources. Again, you win some, you lose some.
Ah, the first state of the United States of America represented by the “American holly” flower. It doesn’t get any more American than that. Even though this state is used to being “number one” it is ranked number 4 of the states with no property tax. Out of all the states we have talked about so far, Delaware relies the least on property tax collections as a main source of revenue.
In fact, it does not rely whatsoever on property tax. The low rate is a result of Delaware’s reassessing property values, along with the benefits given to them by loyal corporations. Treating these corporations favorably worked out in Delaware’s favor.
District of Columbia
D.C. is ranked the 5th lowest property tax across the nation. D.C.’s policies are the main contributors to the low property taxes. The homestead deduction policy lowers the amount of a property’s assessment that is subject to property tax. This deduction is adjusted for inflation.
D.C. also has an assessment cap, limiting the annual increase in taxable assessment to 10 percent. This means that no matter how much your property value grows in a year, the taxable portion will not grow more than 10%. These two measures allow D.C. to be considered part of the states with no property tax. D.C. is one state to consider for investment properties.
Find the best investment properties in cities within any of these states now and save on property taxes. Click here to start your search!
To Tax or Not to Tax
States with no real estate taxes are sort of the unicorns of real estate. They are non-existent. We can, however, find horses in the wilderness. Close, but not exact. That is the case with these states with low property tax. Being a real estate investor who owns investment properties in states with low property tax lessens one’s tax burden.
Stress the phrase “lessens one’s tax burden” and not “completely diminishes.” Where you choose to put your money is up to you in 2018, but be aware of what those tax rates really behold. Mashvisor can be your armor when you need it, giving you the hard data of the real estate world.
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