When considering where to purchase an investment property, taxes have to be part of the conversation. Although calculating capitalization rate and projected cash-on-cash returns can help you get an idea of your gains with property tax, it’s important to understand how the local rates can affect you. For this reason, investors are constantly looking to place money in states that don’t have property taxes.

Are there states with no property tax? More importantly, how much does the tax rate cut into an investor’s returns? With a little research, every investor can make savvy decisions that give them a tax advantage every year. We’re here to help guide your research and provide answers to your property tax questions.

How Property Taxes Are Calculated

Property taxes differ from state-to-state and county-to-county. So how can investors find opportunities in the states with the lowest property tax? It all comes down to the analysis of nationwide averages and data.

According to an analysis by WalletHub, the average homeowner in the United States pays $2,471 every year in property taxes. However, that number may change based on multiple factors. For example: in the states with the lowest property tax, the rates are below one percent – meaning taxes are assessed in the hundreds, not the thousands.

Do Investors Pay More Property Tax vs. Owner Occupants?

When considering where to purchase investment property at auction, the local laws can have an effect on how much investors pay. However, as a general trend, investors pay more in property tax than owner-occupants – even in the states with the lowest property tax.

Why do investors pay more than occupants? When local tax assessors set property values, those which are owned by investors are valued higher because they create passive income for the owner.

As a result, there are several assumptions that assessors can make about those properties – including the fact that they are in desirable areas and could potentially draw more taxes when sold. This is why investors often look for opportunities in the states with the lowest property tax: the right property can yield long-term income at a low premium.

Are there States with No Property Tax?

Unfortunately for investors, there are zero states that don’t have property tax. Every state and the District of Columbia have at least one-half percent of property tax assessed on each property owned by both investors and owner-occupants.

That doesn’t mean that there are no opportunities for investors to make tax-smart investments. Every year, there are numerous properties that go up for foreclosure sales in the states with the lowest property taxes. Through calculating potential taxes on an investment property and working with a tax professional, every investor can find the right opportunities to add to their portfolios.

States with The Lowest Property Tax

While there are no states that don’t have property tax, there are a number that feature the nation’s lowest tax rates currently. If property tax is a concern for your investment, you may want to consider investing in these locations.

  1. Alabama: 0.41% Tax Rate
    According to WalletHub’s analysis, Alabama effectively leads the states with the lowest property taxes. On the median property value, owners pay around $587 in annual tax. Talk about a sweet home Alabama!

  2. Louisiana: 0.55% Tax Rate
    The destination best known for bayous and Mardi Gras is second among the states with the lowest property taxes. Homeowners in Louisiana pay around $890 on the median property value, cutting down on the overhead for investors.

  3. South Carolina: 0.57% Tax Rate
    With destinations including Hilton Head and Myrtle Beach, the Palmetto State is one of the most affordable for property investors. On the median home value, owners pay around $924 to the government for taxes every year.

  4. West Virginia: 0.58% Tax Rate
    Country roads could take you home to one of the states with the lowest property taxes in the U.S. With a 0.58% tax rate, the average homeowner pays only $698 in taxes.

  5. Arkansas: 0.62% Tax Rate
    Home of the Razorbacks, Arkansas is another one of the states with the lowest property taxes. At an average rate of 0.62%, the average home has a tax obligation of around $798.

States with The Highest Property Tax

Although several locations are among the states with the lowest property taxes, other states don’t offer as hospitable of an environment for investors. The following states have the highest property tax rates in the country currently.

  1. New Jersey: 2.49% Tax Rate
    The Garden State is home to many commuters going between New York City and Philadelphia – but living near major cities comes with a costly tax bill. On the average home value, owners pay an average tax bill of over $8,000 – making New Jersey the most expensive state for property taxes.

  2. Illinois: 2.27% Tax Rate
    Living in sweet home Chicago – or anywhere in Illinois – comes with a tax bill that has property owners singing the blues. The second-highest on this list, Illinois residents can expect to pay an average of $4,419 in annual tax.

  3. New Hampshire: 2.18% Tax Rate
    The charm of New England living has a tax burden for owners. New Hampshire residents rank third among US residents paying the highest tax rates. If you decide to invest here, be prepared to pay an average tax bill near $5,701 every year.

  4. Connecticut: 2.14% Tax Rate
    Home of the second biggest media center outside of New York City, Connecticut residents and investors are subject to the fourth-highest tax rates in the country. Those who buy homes in this state typically pay about $5,900 in annual taxes.

  5. Vermont: 1.90% Tax Rate
    Best associated with snow and maple syrup, Vermont is the fifth-most expensive place to pay property taxes. Anyone who decides to invest in this state should budget an average of $4,329 for property tax.

Ways to Minimize Your Property Tax Burden

There are still smart ways to minimize your property tax burdens if you plan on buying property in a location outside of the states with the lowest property taxes. In fact, many tax considerations may already be in the investor’s control.

First, start with the local tax assessor’s office to determine how they came to the valuation of your home. After purchasing the home, investors can always request to have the property re-evaluated, with the goal of reducing the annual tax burden.

From there, investors can limit their improvements to the property. Instead of changing the front elevation and interior amenities, owners who keep homes in line with the neighborhood average may reduce their annual burden.

Finally, search the public records for the value of similar homes in the neighborhood. Even though you may not be investing in the states with the lowest property tax, you can still reduce your annual tax due by keeping the home with the local standards.

Conclusion

Although there aren't any states that entirely forgo property taxes, that doesn’t mean you have to pay a fortune to the government every year. Through smart investing and heeding the advice of a tax professional, your investment homes can maximize passive returns while minimizing expenses in your control.

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