There are a lot of expenses associated with owning rental properties, and propertytax is one of them. Some expenses, like repairs and renovations, will end up in varying amounts depending on how much is needed to be spent. Other expenses are fixed within a rate. Obvious examples include mortgage payments and the topic of this article – property taxes.
Property taxes can have a considerable impact on your overall cash flow. In fact, some real estate investors see their state’s high property tax rate as an incentive to invest out of state.
Related: Out-of-State Real Estate Investing: The Good and The Bad
So, that begs the question: Which states are the best to invest in considering property tax? In other words, which states have low property tax, or even, are there states with no property tax?
Spoiler alert: States with no property tax don’t exist. However, some states have property taxes that are so low that they are essentially ‘states with no property tax’. Before we start listing these states, let’s backtrack and learn a thing or two about property taxes.
Virtually everything comes with a tax, and real estate property is no exception. When dealing with real estate, property taxes include taxes on land, the property on that land, and the rights and interests of the investment property.
Taxes are based on a factor. With property taxes, this factor is the real estate property’s value, or, as it is officially known, the fair market value. The FMV takes factors like the real estate property’s condition, age, and nearby properties into account. The fair market value, as you may know, is determined by professional property appraisers. The appraisers use three valuation methods to assess value. These methods include the sales comparison method, the income method, and the cost method. Finally, once the property’s value is assessed, a percentage of that value is taken as the property tax rate.
Related: What Are the Main Property Valuation Methods?
Like all other forms of taxes, property taxes are used by the government for public purposes. These include repairing roads, upkeeping neighborhoods, and funding public facilities like police stations, schools, and parks.
Property taxes can be collected by cities, counties, and local school boards. Local governments and counties set the rates of property taxes. The tax is paid to the respective government semi-annually or through monthly payments. There are exemptions of property taxes for senior citizens, veterans, and the disabled.
Now that we’ve covered the basics, we can go on to list the states with no property tax.
States with the Lowest Property Taxes
Once again, there are really no states with no property tax. Instead, some states have low rates that are essentially next to nothing. Here are the states with the lowest property tax rates, along with the annual property taxes paid at the state median value. This data is according to WalletHub’s 2017’s “Property Taxes by State”.
1.) Hawaii: 0.27%; $1,406
2.) Alabama: 0.43%; $543
3.) Louisiana: 0.49%; $707
4.) Delaware: 0.54%; $1,243
5.) District of Columbia: 0.56%; $2,665
6.) South Carolina: 0.57%; $798
7.) West Virginia: 0.58%; $607
8.) Colorado: 0.60%; $1,489
9.) Wyoming: 0.61%; $1,196
10.) Arkansas: 0.62%; $693
11.) Utah: 0.68%; $1,472
12.) New Mexico: 0.74%; $1,188
13.) Tennessee: 0.75%; $1,062
14.) Idaho: 0.76%; $1,246
15.) Mississippi: 0.79%; $813
16.) Virginia: 0.80%; $1,948
17.) California: 0.81%; $3,104
18.) Arizona: 0.81%; $1,356
19.) Montana: 0.81%; $1,652
20.) Kentucky: 0.81%; $1,042
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Related: The Best States to Buy Real Estate at the Moment
Don’t Move Out of Your State Just Yet!
Awesome, so now you know what the ‘states with no property tax’ are. But before you decide to pack your bags and move to another state to invest in real estate, read on to understand the full picture.
While there are essentially states with no property tax, like Hawaii, there are other facts you need to know before deciding to invest in certain states. Let’s stick to the Hawaii example. While the Aloha State has the lowest property tax rates at 0.27%, it has the second highest income tax rates among states with income taxes! The benefit of having the lowest property tax rates may not matter too much for investors in Hawaii.
Hawaii may have the lowest property tax rate, but it isn’t the state with the lowest property taxes paid. That state would be the next one on the ‘states with no property tax’ list, Alabama. Why is this the case? The average fair market value of investment properties in Alabama is much lower than that in Hawaii. According to WalletHub’s data, the median home value in Alabama is $125,500. The median home value in Hawaii is $515,300. That’s four times the median home value of Alabama!
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Hawaii and Alabama are not the only states with such considerations. Delaware has different forms of property taxes, including county and school district property taxes. Some states with high property taxes, like Texas (1.90%; $2,578) are low in other taxes. Texas may have high property taxes, but it has no state income tax. Other states, like Illinois (2.30%; $3,995) and New Jersey (2.35%), have high rates for most types of taxes. Illinois and New Jersey had the second highest and the highest property tax rates, respectively, on the list. The annual property taxes paid at the state medium home value in New Jersey are at a mind-boggling $7,410! That’s over TEN times that of Alabama!
The Bottom Line
States with no property tax are a pipedream, but some states are pretty close to it. This would depend on the property tax rate at the local level, not the state level. Regardless, it is important to be aware of a state’s property tax rate before investing in real estate there, as it can impact your overall cash flow. Property taxes are a vital and mandatory expense, so take them into full consideration when planning rental expenses.
Speaking of planning rental expenses, head over to Mashvisor and use its interactive and efficient investment property calculator!
Have you invested in a state among the ‘states with no property tax’? Let us know about your experiences with these taxes in the comments below!