When buying or selling property in a new state, it’s wise to consider how property taxes might fluctuate from one state to another. Especially for those looking to invest in multiple properties, understanding the states with the lowest property taxes can help optimize taxpayer obligations and allow investors to further expand their assets. In this article, we’ll explore which of these states feature the most attractive property tax rates, which states have the highest property tax, as well as how those looking to purchase real estate can calculate these taxes.
What Is Property Tax?
Property taxes are taxes paid by property owners. The owners can be individuals or legal entities, such as corporations or other types of businesses. The amount of tax to be paid is assessed by the local government where the property is located. We’ll talk about how the tax is calculated in the next section. While property taxes typically refer to real estate assets, some states might also assess taxes on other property types such as cars and boats. For some states, a significant source of local income for local governments comes from property tax payments, funding municipal projects such as public transportation, academic development, road improvements, and more.
Do you own property in one or more of the states with the lowest property taxes? You should know this if you own real estate, especially with tax season coming up. According to Forbes, the total amount of property tax collected in 2019 was $306.4 billion. With 86 million single-family homes in the U.S., that was an average of $3,561 per household or an average tax rate of 1.14%. However, this average does not paint the whole picture. Although every state imposes property tax, the tax rate varies greatly from state to state. Property taxes can be very low in one state but very high in the next. That’s why you should be aware of the tax rate in the state, or states, where you own any real estate.
What Are Property Taxes Used For?
Now you may be thinking, “if I’m going to pay a lot of taxes as a property owner, I want to know where my tax dollars are going.” Local governments predominantly use property tax dollars to fund public services. Although taxes can be expensive, you may find some reassurance knowing that your tax dollars are typically used to improve your local neighborhood, schools, parks, infrastructure, and amenities. These can help improve the attractiveness of your zip code, and thus help you bring in higher-paying tenants over time and improve your property value.
Here are some examples of where your property tax payments might go:
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Building or improving public schools
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Maintaining city parks and other green spaces
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Help pay for museums, libraries, and other public amenities
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Road construction and repair
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Salaries and operational costs of emergency services
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Local government services, administration, and infrastructure
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What States Don’t Have Property Taxes?
A common question for new real estate investors is “Are there states without property taxes?” While every state has a minimum property tax, the reliance on these taxes for local projects and plans can be what drives investor interest. Property taxes are just one tax type in a combination of other state taxes, such as income tax or sales taxes. Some investors might purchase real estate in a part of the country with low-income taxes to minimize their taxpayer obligation overall (Texas and Florida are both popular real estate markets for this very reason.)
Martin Orifice from Rent to Own Labs suggests that “states with low or no property taxes get more buyers than states with property taxes. In fact, states with low taxes have a greater population growth than states with high taxes. This means by investing in states with low property taxes, real estate inverters can close better deals and pack more profits. It’s all about making a lucrative investment with good ROI”.
Property taxes are essential; they are used to fund government services critical for the public good and welfare. Therefore, every state assesses property taxes in one shape or form. However, the good news is that some states have a much lower property tax rate than others, and investors can strategically explore property options with attractive property tax rates.
How Are Property Taxes Calculated?
Property tax is calculated using the value of the property in question. More specifically, the value is assessed based on the type of property, its structure, and the land that it sits on. For example, a vacant plot of land will have a much lower tax than its neighbor with a similar plot of land with a house and guest cottage. If the property has access to public services or has the potential for further development, higher taxes could be assessed.
Each state computes its property tax rate using its own unique formulas. However, they all share two common factors: the property’s assessed value and the percentage tax rate. Because of this, it’s easiest to look at the tax rate itself when comparing and contrasting property taxes between states.
For example, let’s say person A in state A owns a home worth $1 million. They were assessed a property tax of $10,000 last year. That’s a property tax rate of 1 percent. Then, let’s say person B in state B owns a condo worth $150,000. However, they were assessed a property tax of $10,000 last year as well, the same amount person A paid. That’s a whopping 7 percent property tax rate. Although person A and person B paid the same dollar amount, you can easily tell that person B has a much heavier tax burden by looking at the property tax rate.
Who Sets Home Value?
After looking at the example above, you’re probably wondering who exactly determines why person A and person B in the example above paid what they did in property taxes last year. The entities that set home values in each state are tax assessors, and they are typically government agents who value your property every one to five years. They will look at other similar properties in your market and compare recent sales prices to determine your property’s value. Unique formulas are also involved, and as you might imagine, this involves a lot of complicated math.
These tax specialists look at numerous other factors unique to each state and properly calculate tax rates. It might be that Person B’s condo was located a short distance from a popular tourist attraction, or perhaps Person A’s home is valued at a higher value but local property taxes are considerably low for that area. You can expect your tax bill to go up if you add any value to your home, such as by adding a pool or building a second story. Most states offer an appeal process so that there is some recourse if you feel like your property value assessment is unfair or unreasonable.
10 States With The Lowest Property Taxes
Here’s the moment you’ve been waiting for: the big reveal of the 10 states with the lowest property tax rates! If you own property, then you’ll know the pain of having had to pay property taxes every year. However, if you own property in one of the states listed below, this annual expense is less of a burden. If you’re thinking about buying real estate, you might consider investing in real estate in one of the following states, even if you don’t plan to live there.
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Hawaii (0.31%): The state with the proud title of having the lowest effective property tax rate in the country is the Aloha state, Hawaii. Don’t be misled, while Hawaii flaunts a property tax rate of only .30%, this state also has the highest median home value in the country. Since property tax is based on a percentage of the home’s value homeowners can still anticipate a substantial tax bill.
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Alabama (0.37%): With one of the lowest property tax rates in the country as well as property values well under the national average, Alabama is one of the most affordable states to consider for real estate investors or future property owners.
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Louisiana (0.51%): Louisiana boasts a low effective property tax rate and property values that fall considerably lower than the national average. The cost of living is also great, with gas taxed at only .20 cents per gallon.
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Wyoming (0.51%): Wyoming homes tend to be a tad higher than some of the other states here, but with no state income tax and a 4% state sales tax, Wyoming is one of the most affordable states to live in.
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Colorado (0.52%): Colorado property taxes are quite low, but high home prices might increase potential tax burdens. With a high median household income, this obligation can be more easily addressed.
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West Virginia (0.53%): The combination of low effective property taxes and modest home prices, make West Virginia one of the most attractive states in the country for potential real estate investors.
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South Carolina (0.53%): While South Carolina and Colorado have identical property tax rates, South Carolina’s home values tend to hang on the lower side, giving this state appealing benefits.
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Utah (0.56%): While Utah has some of the higher property tax rates within this list due to the higher median home values, the overall household income is very high in this state.
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Delaware (0.59%): Delaware residents might have to pay a bit more in property taxes, this is mostly due to above-average home values. However, with no sales tax and a high median household income, Delaware is still an attractive option for those looking to save on tax payments.
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Arkansas (0.61%): The combination of low effective property tax rates with low overall housing costs makes the cost of living attractive in Arkansas. For example, gas is taxed at .25 cents/gallon, lower than the national average, but the state features a higher sales tax rate.
Take Note
While many of these states feature attractive property tax rates, it’s never as simple as looking at just one component of property tax evaluations. Purchasing a high-valued property will likely bring along a larger tax bill regardless of the property’s location. However, by looking at property tax rates as well as typical median income and general cost of living expectations, real estate investors or future homemakers can identify the most prosperous options.
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10 States With The Highest Property Taxes
Next, we’ll reveal the 10 states with the highest property tax rates in our country. Do you own property in one of the following states? If you have felt like your property taxes were high, this will validate your feelings. If your state didn’t make it into this top 10 list, now you know that there are property owners out there paying much higher taxes than you are.
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New Jersey: 2.49%
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Illinois: 2.27%
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New Hampshire: 2.18%
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Connecticut: 2.14%
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Vermont: 1.90%
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Wisconsin: 1.85%
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Texas: 1.80%
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Nebraska: 1.73%
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New York: 1.72%
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Pennsylvania: 1.58%
Take Note
Just as we covered by looking at the states with the lowest property taxes, the states listed above might be attractive to real estate investors for other reasons, such as a lack of income tax or low effective home values. Depending on the property’s location, homeowners might also qualify for property tax exemptions offered by local jurisdictions.
For example, homestead exemptions are tax breaks for certain portions of a home’s value and are typically offered to those who meet age or income requirements following the death of a spouse or declared bankruptcy. Other exemptions exist as well, such as lower taxes for senior, disabled, or veteran homeowners. While these exemptions should be leveraged when possible, homeowners need to seek assistance if interested because they will not be automatically dedicated from their property taxes.
Cities With The Highest Property Taxes
Cities also have some jurisdiction over property taxes, creating even more variability in property tax rates across the country. Many New Jersey cities are known for higher property tax rates, but certain Illinois localities are rising as well. According to research provided by Roofstock, here are a few cities with the highest property taxes in the US:
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Elizabeth, New Jersey: 3.18%
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Paterson, New Jersey: 3.18%
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Waterbury, Connecticut: 3.16%
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Rockford, Illinois: 2.67%
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Peoria, Illinois: 2.59%
Average Property Tax Rate By Region
Generally average property taxes vary by region, with certain areas in the US having higher averages than others. For example, the New Jersey towns listed above might suggest the Northeast has some of the highest property tax rates by region. The following list, created from research at Quicken Loans, outlines average tax rates by region:
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Northeast: 1.41%
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Midwest: 1.29%
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Southwest: .91%
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West & Southeast: .66%
How To Lower Your Property Taxes
If you are interested in lowering your property taxes, know that you are not the only one! Many Americans wish for lower property tax rates to help ease the costs associated with homeownership. Not surprisingly, there are a few ways you can achieve this goal. The following options exist to help lower your property taxes:
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Check Eligibility For Property Tax Exemption
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File For A Homestead Exemption
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Raise Concerns With The Tax Assessor
Check Eligibility For Property Tax Exemption
There are certain property tax exemptions available at the state and local level, depending on where you live. Thy are typically reserved for seniors, veterans, active-duty service members, and individuals with disabilities. If any of these apply to you, you can apply for an exemption with your county. Note that for some of these categories, there may be additional income requirements as well. In some situations, homeowners may be eligible for a complete exemption from property taxes.
File For A Homestead Exemption
The homestead exemption can be used on primary residences as a way to lower property taxes. The exemption essentially protects homeowners up to a certain amount or percentage of their annual property taxes. The exact exemption amount depends on your state. For example, in Colorado homeowners may be eligible to exempt up to $75,000 of their home.
Raise Concerns With The Tax Assessor
A tax assessor is the person in charge of appraising properties and gathering information to establish the property taxes. The assessment relies on the property age, lot size, location, and features of the house. Homeowners interested in learning more about their property assessment can request further information from the county clerk. They should be able to provide assessment material from years prior as well. If you notice any inconsistencies, be sure to alert the county assessor. In most cases they will be able to conduct a new assessment and fix any areas — if there are any. When successful, this can result in a lower property tax bill.
Summary
Above, we revealed the 10 states with the lowest property taxes and the 10 states with the highest property taxes. Understanding property taxes by state and knowing how property taxes are calculated can be incredibly helpful when pulling the trigger on any real estate investment. Whether you’re purchasing your first home or investing in multiple real estate opportunities, knowing the states with the lowest property taxes can help lighten anticipated tax payments. Suppose you’re looking to minimize property tax payments. In that case, a property in Hawaii with a property tax rate of 0.30% will look more attractive than a property in Illinois with a property tax rate of 2.22%. With a difference of 1.92%, this shows us that property taxes vary significantly from state to state.
As a property owner and real estate investor, the local property tax rate can and should influence your decision on where to invest. If you’re interested in buying real estate in a different state from the one you live in, here’s our guide on how to invest in real estate from a distance. If you’ve been wondering how to find out how much you’ll need to pay in property taxes, visit your county’s assessor website. Some even offer handy calculators so that, come tax season, the bill won’t come as an utter surprise. By getting ahead of future tax payments, you can minimize potential losses and more properly anticipate property tax costs. While choosing a home will depend on countless factors, from location to overall home value, knowing which states have the lowest property taxes is a great place to start.
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