Owning real estate is a great way to build wealth, but it comes with its fair share of costs, and property taxes are one of the most significant. As a real estate investor, property taxes can take a large chunk out of your profits if you’re not careful. The good news is that there are strategies you can use to minimize your property tax burden and keep more money in your pocket.
In this blog, we’ll go over some simple and effective ways to reduce your property taxes, whether you own rental properties, commercial real estate, or even just a second home.
1. Understand How Property Taxes Are Calculated
Before we dive into strategies for lowering property taxes, it’s important to understand how they are calculated. Property taxes are generally based on two things:
- The assessed value of your property: This is the value the local tax assessor assigns to your property based on market conditions, location, and the condition of the property.
- The tax rate (millage rate): This is the percentage of your property’s value that you’ll need to pay in taxes. Tax rates vary by location and can be affected by local government needs, schools, and other public services.
Knowing how your property taxes are calculated helps you identify areas where you can potentially lower your tax burden.
2. Appeal Your Property Tax Assessment
One of the most straightforward ways to lower your property taxes is to appeal your property tax assessment if you believe your property has been overvalued.
2.1 How to Appeal
- Get your property’s current assessment: This is usually available on your local government’s website or can be mailed to you. Compare the assessed value with similar properties in the area.
- Check for inaccuracies: Look for errors in the property description that might inflate its value, such as an incorrect number of bedrooms, bathrooms, or square footage.
- Provide evidence: Gather data to show that your property has been overvalued. This could include recent sales of comparable properties or an independent appraisal.
- File the appeal: Most local governments allow you to appeal your property tax assessment within a certain period after receiving it. Follow the instructions on how to file your appeal, and make sure to meet any deadlines.
2.2 Why It Works
Appealing your property’s assessment can result in a lower assessed value, which directly reduces your tax bill. It’s a relatively easy process, and many property owners are successful in reducing their taxes by doing this.
3. Take Advantage of Tax Exemptions and Deductions
Many states and local governments offer property tax exemptions and deductions that can significantly lower your tax burden.
3.1 Homestead Exemption
If you live in one of your investment properties, you may qualify for a homestead exemption, which reduces the assessed value of your primary residence. This exemption can be especially beneficial if you own multiple properties but live in one of them.
3.2 Senior Citizen Exemptions
Many states offer property tax reductions for senior citizens. If you or your tenant is of retirement age, this exemption can lower your property tax liability, especially on residential rental properties.
3.3 Veterans’ Exemptions
Some states offer property tax reductions for veterans or their surviving spouses. If you qualify for this exemption, you can reduce your property tax burden substantially.
3.4 Renewable Energy Tax Credits
If you’ve installed solar panels or other energy-efficient upgrades to your investment property, you may be eligible for tax credits or deductions. Many local governments offer incentives for energy-efficient properties, which can help lower your property taxes.
4. Invest in Properties in Low-Tax Areas
Location plays a major role in how much you’ll pay in property taxes. If you haven’t purchased your investment property yet, choosing properties in low-tax areas can make a big difference in your long-term tax burden.
4.1 Research Property Tax Rates
Before buying a property, research the property tax rates in different neighborhoods or counties. Even neighboring counties can have drastically different tax rates, so it’s worth doing your homework.
4.2 Consider State-Level Taxes
Property taxes are also impacted by state tax policies. Some states, like Texas and Florida, have no state income tax but higher property taxes. Others, like Hawaii and Alabama, have relatively low property tax rates compared to the national average.
By investing in areas with lower property taxes, you can reduce your overall tax liability and increase your return on investment.
5. Depreciate Your Property for Tax Benefits
One of the most powerful tax benefits for real estate investors is depreciation. The IRS allows you to depreciate the value of your property over time, which can reduce your taxable income and lower your property tax bill.
5.1 How Depreciation Works
For residential properties, the IRS allows you to depreciate the value of the property (excluding the land) over 27.5 years. For commercial properties, the depreciation period is 39 years.
- Example: If you purchase a rental property for $300,000 (with the land valued at $50,000), you can depreciate the remaining $250,000 over 27.5 years. This gives you a yearly depreciation deduction of about $9,090.
5.2 Why Depreciation Lowers Taxes
Depreciation reduces your taxable income, which can lower your overall tax bill. While it doesn’t directly reduce your property taxes, it can save you money on federal and state income taxes.
6. Rent the Property for Fewer Than 15 Days
If you own a vacation home or a second home and rent it out for fewer than 15 days per year, you may be able to avoid paying property taxes on the rental income altogether. The IRS doesn’t require you to report rental income from properties rented for fewer than 15 days a year, which could help you save on taxes.
This is known as the 14-day rule, and it’s a great strategy for those who own second homes in popular vacation destinations. Just be sure to track the number of days the property is rented to stay under the limit.
7. Challenge Tax Hikes and Stay Informed
Staying involved in your local community and paying attention to tax policies can help you avoid sudden increases in property taxes. Local governments often propose tax increases to fund new projects or services. As a property owner, you can attend city council meetings or vote on measures that directly affect property taxes.
If there’s a proposal to increase taxes, consider organizing or joining groups that oppose the hike, especially if it will significantly impact property owners in your area.
8. Maintain Your Property’s Condition
While this might sound counterintuitive, keeping your property in slightly below-average condition (without letting it deteriorate) can help lower your property taxes. If your property looks too upgraded or over-improved compared to others in the area, it might be assessed at a higher value.
8.1 Avoid Over-Improving
When making upgrades to your investment property, keep in mind that significant renovations could lead to a higher property tax assessment. For example, installing luxury finishes or building large additions might increase the property’s assessed value, which can result in higher taxes.
9. Use a Property Tax Consultant
If you own multiple investment properties or have high-value real estate, it might be worth hiring a property tax consultant. These professionals specialize in helping property owners lower their tax bills by appealing assessments, finding exemptions, and recommending tax-saving strategies.
A consultant can guide you through the process of lowering your property taxes, potentially saving you thousands of dollars in the long run.
Conclusion
Reducing your property tax burden is one of the most effective ways to improve your return on real estate investments. Whether you appeal your property tax assessment, take advantage of exemptions, or invest in properties in low-tax areas, there are several strategies you can use to minimize the taxes you owe.
By understanding how property taxes are calculated and staying proactive in managing your investments, you can keep your property tax bills low and maximize your profits. Start with these simple steps and consult a tax professional if needed to ensure you’re getting all the tax benefits you deserve.
