Property taxes can substantially affect how much you end up paying for your home and dig into your profits as a real estate investor. They vary widely from state to state, with Hawaii’s average property tax rate at around 0.29% and New Jersey’s at around 2.46%.
While there is only a 2.17% difference between the two, that 2.17% equates to a lot of money. Let’s say you have two homes: one in Hawaii and one in New Jersey, and they both have an estimated value of $500,000. If you’re paying the average property tax rates for each state, you’ll owe $1,450 in Hawaii and $14,546 in New Jersey. That’s a difference of $13,096!
While there are no states without property taxes in 2023, many states have lower property taxes. In this article, we will discuss what property taxes are, how they are calculated, and list the states with the lowest property taxes.
What is property tax?
Property tax is based on the assessed value of your property, which government tax assessors consider your property to be worth. Tax assessors determine this by analyzing current market conditions, the size of your home, comparable properties in your neighborhood, and any home inspection findings. While your appraised value is an excellent indicator of what your property is worth, it doesn’t always equate to fair market value. This can be quite different from the purchase price of your property.
Typically, assessors base property taxes on the property and land you own. In some areas, they may also tax you on boats, cars, RVs, or other personal property.
Why are there no states without property tax?
Property taxes make up most of your local government’s budget. They often contribute to the following:
- local public schoolFunding: Typically, 50% or more of your property tax return goes to the schools.
- public securityProperty taxes pay the salaries of police officers, firefighters, and other safety-related jobs.
- basic maintenance: including maintenance of your streets, parks and sewer systems
- government and municipal administrators: Your property tax helps pay the salaries of your government officials.
- LibraryLibraries and librarians also receive money through property taxes.
If there were no property tax in municipalities or states, we would have to find some other way to pay for all the things listed above. While no one wants to pay property taxes, they are a necessary evil and the only major tax common to all 50 states.
How are property taxes calculated?
The amount of property tax you pay is based on the previous year’s assessed value of your property and the levy rate in your area. The equation is:
Previous year’s assessed value x current levy rate = arrears of property tax
As mentioned earlier, the government tax assessor calculates your assessed value. Meanwhile, your levy rate is determined by a number of factors, some of which are voter-approved. In other words, whenever you receive a voter pamphlet in the mail that talks about levy rates, whether they are approved or not, it will affect how much you pay in property taxes.
It should also be noted that because property taxes are usually a local issue, county rates will vary, affecting the average value across the state.
10 states with the lowest property taxes
28 states and the District of Columbia have an average property tax rate of 1% or less. In other words, if your home is assessed at $500,000, you will pay $5,000 or less in property taxes in most of the United States. However, it’s important to remember that these are state averages. You may pay more or less depending on where you live.
1. Hawaii
| effective property tax rate | 0.29% |
| County with highest property tax rate | Hawaii County, 0.39% |
| County with the lowest property tax rate | Maui County, 0.21% |
Hawaii offers great discounts on owner-occupied residences. While the amount varies by county, homeowners are often eligible for $80,000 to $160,000 in exemptions. After calculating the assessed value, applicable exemptions are deducted before tax rates are applied by local governments.
If your assessed value is $500,000 and you qualify for the $120,000 exemption, you will only be taxed on $380,000.
2. Alabama
| effective property tax rate | 0.43% |
| County with highest property tax rate | Greene County, 0.77% |
| County with the lowest property tax rate | Choctaw County, 0.21% or less |
Alabama’s Public Affairs Research Council reported that if Alabama had Mississippi’s tax rate (currently 0.81%), “the state would have an additional $1.5 billion for education, health care, highways, public safety, and a broad spectrum of state and local Will be. Services rendered.”
A major reason why property taxes are low in Alabama is that it is difficult to change the state constitution. Instead of raising property taxes, local and state governments raise taxes elsewhere, such as sales and sin taxes. According to Al.com, it is one of only three states that impose a sales tax on groceries.
3. Colorado
| effective property tax rate | 0.52% |
| County with highest property tax rate | Kiowa County, 0.83% |
| County with the lowest property tax rate | Jackson County, 0.20% |
Colorado’s property taxes are low for two reasons. First, they are rated in two-year cycles, meaning that any rated increase occurs every other year, not annually. A second, perhaps more influential reason is that property tax rates in Colorado do not apply to market value. Instead, they are used for residential assessment rates, while assessed value accounts for only a fraction of your home’s market value.
4. Louisiana
| effective property tax rate | 0.55% |
| County with highest property tax rate | Orleans Parish, 0.87% |
| County with the lowest property tax rate | East Feliciana Parish, 0.15% |
Louisiana has the fourth lowest property tax rate in the US and the sixth lowest combined state and local taxes among all 50 states. However, if you combine Louisiana’s property tax and vehicle tax rates, it ranks 25th in the US.
5. Nevada
| effective property tax rate | 0.55% |
| County with highest property tax rate | Lincoln County, 0.79% |
| County with the lowest property tax rate | Esmeralda County, 0.33% |
While you can bet your money in Las Vegas, you won’t lose much by paying property taxes in Nevada. In Nevada, landlords are blocking significant property tax increases because of the state’s property tax abatement law. This law puts a maximum of 3% on the increase in the property tax bill across the state.
Another reason Nevada makes a list is that the state’s assessed value for a property equals only 35% of its taxable value. If you own a home in Nevada with an assessed value of $300,000, you only pay real estate tax on $105,000.
6. Utah
| effective property tax rate | 0.57% |
| County with highest property tax rate | Duchesne County, 0.79% |
| County with the lowest property tax rate | Summit County, 0.33% |
There are several factors pointing to why Utah’s property tax rate is so low. Here are the three main reasons:
- Utah offers a 45% property tax exemption for primary residences. If your primary residence is valued at $300,000, you are only taxed on $135,000.
- According to UtahTaxpayers.org, “During the 1990s, the Legislature reduced the statewide basic levy for education twice.”
- In addition, in the 1990s, some counties began reducing property taxes, opting instead to levy a sales tax.
7. South Carolina
| effective property tax rate | 0.58% |
| County with highest property tax rate | Williamsburg County, 0.82% |
| County with the lowest property tax rate | Horry County, 0.37% |
Like others on this list, there are several reasons why the Palmetto State’s property taxes are lower than the national average. For example, owner-occupied residences tend to have lower assessment rates than secondary homes and commercial properties. Owner-occupied residences benefit from an assessment ratio of 4%, compared to non-prime residences, which rate 6%.
In addition, local tax assessors only reassess properties every five years, and cap these reassessments at 15%. In other words, if the assessed value of your primary residence five years ago was $300,000, the maximum that can be assessed for this year is $345,000.
8. West Virginia
| effective property tax rate | 0.59% |
| County with highest property tax rate | Wetzel County, 0.81% |
| County with the lowest property tax rate | Pocahontas County, 0.30% |
West Virginia is known for having low tax rates in general, but this is especially true when it comes to property taxes. In West Virginia, a property’s assessed value equals 60% of its appraised value. If your home’s appraised value is $300,000, your assessed value is $180,000 on which you will be taxed.
Also, homeowners must be notified if the assessed value of their home increases by the greater of 10% or $1,000 in a given year. This gives them an opportunity to appeal the valuation, which can further reduce what they pay in property taxes.
9. Washington, DC
| effective property tax rate | 0.59% |
Although not a state, DC homeowners benefit from several property tax credits and deductions that help them reduce their tax burden. While these deductions do not directly affect property tax rates, they reduce the assessed value of the property. Here are some:
- The Senior Citizens or Disabled Property Owner Tax Relief Program cuts property taxes by 50% on eligible applicants.
- If a homeowner’s principal residence is in DC and that property has five or fewer units, the assessed value is reduced by $75,700.
- The Assessment Cap Credit limits the assessed value to 10% per year.
10. Arizona
| effective property tax rate | 0.60% |
| County with highest property tax rate | Pima County, 0.89% |
| County with the lowest property tax rate | Apache County, 0.34% |
Arizona’s property tax rate is low for two exceptional reasons. First, property taxes in Arizona are assessed by county, district and city based on the assessed value of the home, which is limited to only 10% of the property value. In addition, the total primary tax rate in all districts capped at 1% of the property’s capped value for owner-occupied homes. Any rate above 1% is rounded down to 1%.
conclusion
While no state is property tax-free, there are plenty of states where you can enjoy very cheap rates. Before doing so, check the property tax rate for the municipality you’ll be moving to, as it will often differ from the state average rate. Also, read the fine print regarding other taxes levied by these zones. Sometimes, property taxes are low because local governments are supplementing their budgets with other taxes, such as sales taxes or sin taxes. As with most things, the more informed you are, the more likely you are to make the right decision for you.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
