What is Your Rental Costing You in Property Taxes?

Contributing Writer, B2R Finance | Real Estate Investment,Taxes

Property TaxesBy Joel Hibbard, AVP & Legal Counsel, B2R Finance and Trenton T. Roberts, Attorney at Looper, Goodwine P.C. in Houston, Texas

We all know that taxes can be a headache, but since it is tax season, we thought it might be a good time to talk about property taxes as they relate to investing in single-family rental property.

Real estate property taxes are just one of the many expenses that rental property investors incur with single-family rentals, but the good news for investors is that property taxes are deductible (subject to certain IRS limitations). The deductions available to investors for property taxes, depreciation and various costs associated with the real estate business often tip the scale for investors and justify making leveraged investments into the real estate sector.

The bad news for the casual investor is that property taxes can vary widely from one metropolitan area to another. But like other investment opportunities, variability is the savvy investor’s chance to gain an advantage in the real estate sector. A wise investor is one who is knowledgeable about the projected annual property tax bill before purchasing a property, as it is a major expense that recurs every year.

Real estate data provider RealtyTrac recently produced a report that offers a national view of the wide variations that can be found in property taxes.

The report provides data on effective property tax rates — the average property taxes for single-family properties in 2014 divided by the average estimated value of single-family properties as of the end of 2014.

Did you know that the counties with the highest property tax rates contain the cities of New York, San Antonio, Chicago and Milwaukee? I think many of us would have guessed New York or Chicago, but San Antonio and Milwaukee likely come as a surprise.

States with the highest effective property tax rates were New York (3.01 percent), Texas (2.18 percent), Illinois (2.15 percent), Connecticut (2.11 percent) and New Jersey (2.01 percent).

States with the lowest effective property tax rates were Alabama (0.40 percent), Wyoming (0.55 percent), Colorado (0.55 percent), West Virginia (0.60 percent) and Tennessee (0.64 percent).

RealtyTrac also reports that owners of very high-end and very low-end homes end up with the highest property tax rates.

Nationwide, the average effective property tax rate for all single-family homes in 2014 was 1.29 percent. The rate was higher for low-end homes. The average effective property tax rate was 1.68 percent for homes valued $50,000 or below and 1.4 percent on homes valued between $50,000 and $100,000.

Perhaps less surprising is that owners of high-end homes also tend to pay at a higher than average property tax rate. For owners of high-end homes, the average effective property tax rate was 1.56 percent on homes valued $1 million to $2 million and 1.77 percent for homes valued $2 million to $5 million.

To be sure, property tax bills are something every investor should be aware of, but it need not limit opportunities. It’s good to keep in mind while reviewing property tax rates that real estate investments generally offer larger deductions and tax benefits than many other investment types.

For more information about how B2R can help you obtain rental property financing to grow your business, just call 800-227-8107 or visit www.b2rfinance.com/borrowers and follow us on Twitter @B2RFinance.

LEGAL DISCLAIMER: Any and all advice contained herein is not intended as a legal opinion or as legal, tax or investment advice. Any investor or potential investor is encouraged to seek his/her own legal and tax advice.

The information on this page is provided for informational purposes only and does not constitute investment, real estate, or legal advice. This information should not be regarded as a recommendation or an offer to buy or sell any product or service to which this information may relate. No representations or warranties whatsoever, express or implied, are given as to the accuracy or applicability of the information contained herein. The information may be modified or rendered incorrect by changes in the marketplace or developments in the law, or for any other reason, and may not be applicable to any individual reader’s facts and circumstances.