While housing is generally expensive, property taxes can add additional costs when you buy in a high property state. So how is property tax calculated? What are the states with the highest property tax? What should you do to reduce operating expenses as an investor in a high property tax state? This article would answer these questions.
You should understand that property tax can present a significant tax burden for you as a real estate investor. In New Jersey, for example, homeowners pay an average property tax of 2.42%. Considering a median home value of $496,530, based on Mashvisor data, this means that homeowners could pay up to $12,016 on an average property. So how is property tax calculated?
What is Property Tax and How is it Calculated?
Property tax, real estate tax, or land tax is an ad valorem tax i.e. it is based on assessed value. Local governments charge property taxes based on a property’s worth. These taxes are used to support public infrastructure development, public safety, and build and maintain schools. Tax rates are set based on input from a number of political subdivisions. Apart from city and county authorities, in many states, school boards, fire departments, and utility commissions are involved.
One of the reasons why property taxes are high in some states with the highest property tax rates e.g. Texas and New Hampshire is that “These states rely heavily on them in lieu of other major tax categories. This often involves greater devolution of authority to local governments, which are responsible for more government services than they are in states with greater reliance on state-level revenues”. So it’s possible for many states with the highest property tax rates to have good schools and attractive amenities, compared to states with no property tax. However, as an investor, you need to be able to factor the high tax fees into your cash flow calculation. You can do this with Mashvisor’s calculator. Input your tax charge under expenses and see your monthly cash flow in real-time.
Use the Mashvisor calculator to calculate your cash flow
So how are property taxes calculated? How much is property tax for your real estate investment? Your property tax is calculated by multiplying your home’s assessed value by your average county tax rate. Assessors determine the assessed value of a home. Tax assessors are employed by the municipality responsible for levying the property tax. That municipality is generally the county in which the property is situated.
In some cases, tax limitations restrict the degree to which a person’s property tax can rise in a given year, and rate adjustments are sometimes required to maintain revenue or to ensure uniformity after assessments. You can see more information on how your property tax is calculated via your local government website. You can use this calculator by SmartAsset to determine how much you’ll pay in property taxes. Also, note that, in 2018, a cap of $10,000 per person per year ($5,000 for married couples filing separately) was introduced to federal deductions for state and local taxes (SALT). All real estate, income, and sales taxes applied to the property are included in this amount.
Which States Have the Highest Property Taxes?
In a 2019 article titled, “How High Are Property Taxes in Your State?”, TaxFoundation presented a map of property taxes by state.
Using current data from SmartAsset, here are the rates in 10 states with the highest property taxes, the median property prices in these states based on Mashvisor’s recent data, and the median income for each state (based on US census bureau data). It is important to understand that property taxes are tied to housing values. Accordingly, higher housing prices usually result in higher property tax bills.
1. New Jersey
New Jersey tops the list of states with the highest property taxes. Ocean County, a beachfront location, has the lowest tax rate in New Jersey at 2.05% while Camden county has the highest tax rate at 3.46%.
Average effective property tax: 2.42%
May 2021 median property price: $496,530
Median property taxes paid (on $250,000 property): $6,050
Median income: $38,238
2. Illinois
Illinois has the second-highest property tax rates in the US. Hardin County has the lowest tax rate in Illinois at 0.84% while Winnebago county, located in the north-central region has the highest at 2.99%
Average effective property tax: 2.16%
May 2021 median property price: $ 355,179
Median property taxes paid (on $250,000 property): $5,400
Median income: $32,495
3. Connecticut
Connecticut ranks third for high property taxes. Cities and towns are solely responsible for setting property taxes in this state. In Connecticut, Fairfield County has the lowest property tax at 1.75%, while New Haven County has the highest at 2.33%
Average effective property tax: 2.14%
May 2021 median property price: $ 542,693
Median property taxes paid (on $250,000 property): $ 5,350
Median income: $ 37,865
4. New Hampshire
Although the tax burden in New Hampshire is low since it charges no income tax and no sales tax, property taxes are high at almost double the national average. Carroll County has the lowest property tax at 1.31% while Cheshire county has the highest property tax at 2.74%.
Average effective property tax: 2.05%
May 2021 median property price: $ 508,491
Median property taxes paid (on $250,000 property): $5,125
Median income: $ 35,807
5. Vermont
Vermont has an average effective property tax rate of 1.86%. Grand Isle County has the lowest property tax in Vermont at 1.66, while Windsor county has the highest property tax rate at 2.07%.
Average effective property tax: 1.86%
May 2021 median property price: $ 460,696
Median property taxes paid (on $250,000 property): $4,650
Median income: $ 31,492
6. Texas
Property taxes in Texas are the seventh highest. In Texas, Borden county has the lowest effective property tax rate, at 0.34% while El Paso has the highest property tax rate – a 2.24% rate.
Average effective property tax: 1.69%
May 2021 median property price: $ 384,011
Median property taxes paid (on $250,000 property): $4,225
Median income: $ 30,596
7. Wisconsin
Wisconsin’s average effective tax rate is 1.68%. Wisconsin is one of the states that passed a law that strictly limits property tax increases. Vilas county has the lowest property tax rate in Wisconsin at 0.94% while Milwaukee has the highest at 2.53%.
Average effective property tax: 1.68%
May 2021 median property price: $ 346,266
Median property taxes paid (on $250,000 property): $4,200
Median income: $ 32,000
Are real estate taxes the same as property taxes?
Yes, real estate taxes and property taxes mean the same thing. While the IRS uses the term real estate tax, the term property tax is more mainstream.
How do property taxes affect real estate investors?
While property taxes represent an inconvenience especially if you’re an investor, there’s not much you can do about it since it isn’t regulated by the federal government. Property taxes depend on state and county tax regulations, the value of your property, and where it’s located. The variable you can control is where the property is located. Hence, opting for states with the lowest property taxes is a wise move.
Yet, understand that while the average property tax rate may be low, the overall tax burden might still be high. For example, Washington state property tax is 0.93%, while the overall tax burden in the state is 5.69%. In the same vein, property taxes in Florida are also below the national average, at 0.98%, but the tax burden is at 4.23%.
However, in the states with the highest property tax rates, you can still argue for a lower assessed value on your real estate. Here’s what you should do.
1. Get an independent appraisal
2. Contact your local tax office and ask for a copy of your property’s current assessment
3. Check for discrepancies. If there are discrepancies, file a tax appeal.
You can also qualify for exemptions in some states if you’re a veteran. Use Mashvisor’s calculator to see how much your property tax fees will affect your cash flow.
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