Next to your mortgage payment and utility bills, property taxes, short for real estate property taxes, may be among the highest costs associated with homeownership. According to ATTOM Data Solutions, as of 2020, the average U.S. property tax on a single-family home is $3,719. This amount is up by 4.4 percent from $3,561 in the 2019 tax year.
For some $3,719 may not be a hefty expense, but for many others, a property tax assessment of $3,719 is quite the tax burden. With the average American household income being $87,864, a property tax bill of $3,719 would constitute 4.23% of their annual income and a huge chunk out of their take-home pay. While that may be good for the government, most property owners would like to conserve as much of their household income as possible.
Considering the recent property tax hikes post-COVID, investors and homeowners alike should do their due diligence before purchasing a home. To aid in this decision-making process, let's learn about property taxes and then explore states with the lowest effective tax rates.
What are property taxes?
Property tax (i.e., real estate tax) collections are one of the major sources of revenue for state and local governments. The revenues generated from the collection of property taxes fund many local departments (e.g., police department) and local projects (e.g., paving local roadways). Unlike your income taxes, which are due May 17, the deadline to pay your property taxes are set by your local government and should be paid on time. Failure to remit payment by the local deadline could result in your property being sold at the local government's annual tax sale.
To determine the amount of property taxes you owe, your state and or local government assesses the property tax on the value of your home (unless you live in a Mello-Roos community) using the local property tax rate. The local property tax rate is also called the mill rate. Depending upon the jurisdiction you live in, you may owe state and/or local property taxes. To determine whether you pay both the municipal and state rates, you should contact your local taxing authority. At present, fourteen states do not levy property taxes at the state level; that means those residents only pay property taxes based upon the local tax rate.
Since paying property taxes comes with territory of homeownership, it will be helpful to know which states have the friendliest effective tax rates.
Note: In many jurisdictions, if you do not agree with your annual property tax assessment, you can appeal the assessment with your local taxing authority.
10 States with the lowest effective property tax rate
Hawaii, the Aloha State, known for its beautiful beaches, has the lowest property tax rates in the country. At present, the median property tax rate in Hawaii is .31 % of the home’s value. Based on its effective tax rates, Hawaii is a pretty attractive investment location. While attractive, investors should also monitor the price of homes in Hawaii. Currently, the median home price in Hawaii is $646,733; this has a huge impact on the total amount of property taxes that will be owed annually.
Unlike Hawaii, where the average price of a home is on the expensive side, the average price of a home in Alabama is $147,539. The affordable prices of the homes, along with its low effective tax rate, makes Alabama a great state for real estate investors.
Alabama has the second lowest accessed property taxes in the country. At present, Alabama accesses an average property tax rate of .37% of the home’s value. Given this rate, the average amount of property taxes owed in the state of Alabama is $545.89 based on Alabama’s median assessed value of $147,539.00 (.37% x 147,539). Given these low rates, Alabama is an extremely attractive state to purchase a home.
Like Alabama, Louisiana also has one of the lowest effective tax rates in the country. While the tax rates vary from county to county, the median effective tax rate is .51% and the average home price in Louisiana is $171,485. Given the median effective tax rate and the average price of a home, the average resident of Louisiana pays $874.57 (171,485*.51%) in state property taxes.
Consistent with Louisiana’s tax rates, the effective tax rate in Wyoming is .51%. With identical property tax rates, Wyoming and Louisiana both come in fourth place for property tax rates. While tying at fourth place, the median home value in Wyoming is slightly higher than the median home value in Louisiana, at $254,753. With a higher median home value, owning a home in Wyoming will definitely cost more than in Louisiana.
Colorado, known for its beautiful springs and captivating wildlife species, should also be known for its low property tax rates. That's right: Not only can you experience nature at its best in Colorado, but you can also pay the state some of the lowest property tax rates in the country. Colorado’s property tax rate is .52%, and the median price of a home in Colorado is $412,819.
Slightly higher than Colorado, with a property tax rate of .53%, is South Carolina. South Carolina, the Palmetto State, is one of the states with the lowest property tax rates. Not only does it have friendly tax rates, but it is also well known for its manufacturing and great beaches. This makes South Carolina an eye-catching location for many real estate investors.
West Virginia, the Mountain State, also has great effective tax rates. With effective property tax rates of .53%, this may be the state for you. If West Virginia is your next move, plan on enjoying the visual splendor and plentiful outdoor options in the beautiful Appalachian Mountains.
When many people think of Nevada, they often immediately think of Las Vegas, but they should also think of great property tax rates. According to the tax foundation, the effective tax rate in Nevada is .56%. This makes it a great place to potentially purchase a home and also hop on a blackjack table or two.
Tying with Nevada is Utah, with an effective tax rate of .56%. Since both of these states have the same effective tax rate, if you're using the effective tax rate to decide between the states, the decision will boil down to personal preference. Utah is full of serene landscapes, like the Canyonlands National Park and the Grand Staircase-Escalante National Monument, while Nevada is home to world-renowned Las Vegas, where you can visit more than 100 casinos or take a stroll on the Las Vegas Strip.
District of Columbia
Trailing behind Utah and Nevada is the District of Columbia. The District of Columbia, the nation's capital, has an effective tax rate of .58%. Investors looking to invest in the nation's capital will not only enjoy attractive effective tax rates but will also get a chance to indulge in the sophisticated neighborhoods near Capitol Hill and the beautiful view of the National Mall.
Millionacres bottom line
In today’s economy with home prices on the rise, investors should consider the effective property tax rates before purchasing a home in any state. By keeping property tax rates on your mind, you will be able to keep an eye on your bottom line; making a profit from investing in real estate.