There are many expenses and costs associated with investing in real estate such as property tax. Taxes, however, differ from one state to another, meaning that investing in real estate in states with no property tax seems like a good idea for real estate investors who are looking to make as much money as they can.
But first, let us explain whether this theory is true and help you understand property tax and how it affects your real estate investment.
Property Tax: Definition
Most local governments in the US impose a property tax on property owners or real estate investors and it becomes an obligation for them. The property tax is usually computed or calculated as the fair market value of the property times an assessment ratio times a tax rate. In all cases, the tax liability of the taxpayer is fixed while the taxpayer’s income is not.
Furthermore, property tax is not self-computed by the owner, but rather a legally enforceable obligation that is attached to the investment property at a specific date. Therefore, in the US, there are states with no property tax or low property tax and others with high property tax. Let us take a look at states with no property tax.
States With No Property Tax
As a real estate investor or a beginner, you must be aware of the importance of location as an integral element in identifying the value of your investment property that directly affects your return on investment. On the other hand, the location of your property also determines whether you will pay property tax or not based on whether you’re investing in states with no property tax or not. Property tax can also be a big part of your housing budget depending on where you live. Although literally, there are no states with no property taxes, there are, however, states with low taxes that almost do not affect your housing or investment budget. These are relatively considered to be states with no property tax when looking at it from a real estate investment perspective.
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While New Jersey continues to lead the nation with the highest property tax rate, Hawaii is the state with the lowest property tax rate or one of the states with no property tax, almost. In New Jersey, for instance, a home assessed at $300,000 would generate a $7,200 tax bill. Compare that to just $810 in Hawaii, one of the states with no property tax. However, home prices vary geographically, so while property taxes are lowest in Hawaii or almost considered as one of the states with no property tax, the state’s median home price — at $538,400 in 2016 — is among the highest in the nation. (The median home price nationwide in 2016 was $184,700.)
States With the Lowest Property Tax Rate or States with No Property Tax
HAWAII
Tax rate 0.27%
Median home price $538,400
Taxes $1,459
ALABAMA
Tax rate 0.43%
Median home price $128,500
Taxes $550
LOUISIANA
Tax rate 0.51%
Median home Price $148,300
Taxes $750
DELAWARE
Tax rate 0.55%
Median home price $233,100
Taxes $1,274
DISTRICT OF COLUMBIA
Tax rate 0.56%
Median home price $506,100
Taxes $2,811
Let us break down these numbers and understand what they mean.
- Hawaii
As stated above, Hawaii has a property tax that equals 0.27% of average home values. The median home value in Hawaii is $538,400, and the median property taxes on that home are $1,459. However, the state has the second-highest income tax among states that have income taxes, which contributes to a high state tax burden overall. This overall burden is partially a contributing factor to higher prices and a harsh business environment. - Alabama
Alabama has a property tax that is equal to 0.43% of average home values in the state. The median home value in Alabama is $128,500 and the median property taxes on a home are $550. In 2012, for instance, Alabama continued to have a low overall tax burden per capita. The state has a sales tax of roughly 2 percentage points below the national average of 5.95%, and it imposes a personal income tax between 2 and 5%. - Louisiana
Louisiana has the third lowest property tax as a percentage of average home values, with a tax of 0.51%. The median property taxes on a home in Louisiana are $750 on a median home value of $148,300. Louisiana also offers a property tax break known as the Restoration Tax Abatement, giving landowners a tax break based on the dollar value of property renovations. The state also has an income tax bracket that ranges from 2 to 6% and is subsidized by the federal government, allowing it to impose a low tax burden overall. - Delaware
Delaware has a property tax equal to 0.55% of average home values within the state. The median value of a home in Delaware is $233,100 and the median property taxes are $1,240.
However, the state faces a tight budget and is looking at a property tax increase as one of the best available revenue sources for the state, since other tax revenues tend to be more unsteady. Moreover, Delaware homes are subject to county property taxes, school district property taxes, and vocational school district taxes. - District of Columbia
The District of Columbia has a property tax equal to 0.56% of average home prices in the area. The median property taxes are $2,811 on a median home value of $506,100. The District of Columbia isn’t a state but, in fact, a state-local entity. If D.C. was a state, it would rank highest in the United States in state and federal tax collections per capita.
A real estate investment might contain costs that real estate investors do not take into consideration. Read “Investment Property Costs to Consider This 2018“ to get a closer look at investment property costs to consider while investing in real estate.
Is It a Good Idea to Invest in Real Estate in States With No Property Tax?
It is a no-brainer that living in a state with low property taxes as a percentage of home value provides a low property tax burden for the taxpayer or the real estate investor which makes him/her make more money in real estate. However, you have to keep in mind that low property taxes or states with no property tax do not necessarily mean that residents in these states bear low tax burdens overall. Some states offset low property taxes with higher taxes on income or consumption. It is actually a good idea to invest in real estate in states with no property tax as it can, in some cases, reduce the burden of costs associated with real estate investment. However, it all depends on the type of property, location and other expenses associated with it.
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