Property taxes can be one of the largest expenses of owning and operating a rental property, depending on the state the home is located in. Taxes on property are an on-going expense, even after the mortgage is paid off, and generally go up as home values increase.
Although there’s no way to avoid paying property taxes, there are things an investor can do to help reduce the amount of taxes paid on a rental property.
Key takeaways
- County assessors use various methods to determine property value, then apply an assessment ratio to determine assessed property value for tax purposes.
- Some of the lowest property tax rate states include Hawaii, Alabama, and Louisiana, while some of the highest property tax rates can be found in New Jersey, Illinois, and New Hampshire.
- Methods for potentially lowering the assessed value of a property include ensuring the county assessor’s data on the home is correct, comparing the assessed values of similar homes in the same neighborhood, and analyzing the effect improvements could have on property taxes.
What are property taxes?
Also known as real estate taxes, property taxes are paid by owners of real estate to the assessor or local taxing authority in the county the property is located.
Property owners receive a notice of property value assessment (usually every one or two years), indicating the value of the property for tax purposes and the amount of property tax due.
Property taxes are levied by the state, county, and local governments to pay for services such as public safety, local school systems, and infrastructure projects like roadways and water treatment facilities.
How property taxes are assessed
Property taxes are calculated based on the assessed value of a property, which isn’t always the same thing as market value. That’s because the assessor is valuing property for tax purposes, not to buy or sell the real estate.
Assessing property value
A county assessor normally appraises property values once a year or so, depending on the customs of the county the property is located in. In some states and counties, property values are only updated for tax purposes when the property is sold. In other jurisdictions, a rental property may be taxed at a different rate than an owner-occupied home.
The assessor may value property based on recent sales comparables, the cost to replace a property, or the income method, or a combination of the three methods. Once a property value is determined, the county assessor will apply an assessment ratio to the property, which is the percentage of the property value used for taxing purposes.
For example, if the assessor determines a home has a market value of $150,000 and the assessment ratio is 75%, the assessed value of the property for tax purposes is $112,500 ($150,000 market value x 75% assessment ratio).
Determining property tax
Property taxes are determined by multiplying the assessed value of the property by the millage rate for each taxing district or authority within the county.
A millage rate is the amount of levied taxes for each $1,000 in property value and is expressed as tenths of one cent, which means that one mill equals $0.001.
If a property has an assessed value of $125,000 and the total millage rate used by the county is $0.004, the taxes on the property would be $500 ($125,000 assessed value x $0.004 millage rate).
Property tax by state (sorted by lowest to highest)
To help investors better understand how property taxes vary by state, we’ve compiled the following chart that lists property taxes for each state.
Property taxes can and do vary widely from one place to another based on the assessment ratio and millage rate the county uses. For example, a $150,000 home in Alabama could have a property tax assessment of $555, while a home with the same assessed value of $150,000 in Illinois could have a property tax assessment of $2,955.
Zillow was used to determine the typical value of a middle price tier home (through July 2021), while data from the Tax Foundation was used to calculate property taxes paid as a percentage of owner-occupied home value:
| State | Avg Home Value | Avg State Tax Rate | Avg Property Tax Amount |
| Hawaii | $743,125 | 0.31% | $2,304 |
| Alabama | $175,586 | 0.37% | $650 |
| Louisiana | $190,735 | 0.51% | $973 |
| Wyoming | $276,278 | 0.51% | $1,409 |
| Colorado | $501,345 | 0.52% | $2,607 |
| South Carolina | $230,901 | 0.53% | $1,224 |
| West Virginia | $119,026 | 0.53% | $631 |
| Nevada | $378,779 | 0.56% | $2,121 |
| Utah | $477,484 | 0.56% | $2,674 |
| District of Columbia | $694,711 | 0.58% | $4,029 |
| Delaware | $313,018 | 0.59% | $1,846 |
| New Mexico | $253,438 | 0.59% | $1,495 |
| Arizona | $376,369 | 0.60% | $2,258 |
| Arkansas | $151,472 | 0.61% | $924 |
| Mississippi | $142,485 | 0.63% | $898 |
| Tennessee | $236,323 | 0.63% | $1,489 |
| Idaho | $414,890 | 0.65% | $2,697 |
| California | $700,828 | 0.70% | $4,906 |
| Montana | $367,030 | 0.74% | $2,716 |
| Kentucky | $171,052 | 0.78% | $1,334 |
| North Carolina | $254,625 | 0.78% | $1,986 |
| Indiana | $188,505 | 0.81% | $1,527 |
| Oklahoma | $152,819 | 0.83% | $1,268 |
| Virginia | $332,063 | 0.84% | $2,789 |
| Washington | $529,768 | 0.84% | $4,450 |
| Florida | $305,266 | 0.86% | $2,625 |
| Georgia | $251,514 | 0.87% | $2,188 |
| North Dakota | $247,913 | 0.88% | $2,182 |
| Oregon | $457,158 | 0.91% | $4,160 |
| Missouri | $196,746 | 0.96% | $1,889 |
| Alaska | $304,908 | 0.98% | $2,988 |
| Maryland | $370,289 | 1.01% | $3,740 |
| Minnesota | $305,474 | 1.05% | $3,207 |
| Massachusetts | $525,744 | 1.08% | $5,678 |
| South Dakota | $246,012 | 1.14% | $2,805 |
| Maine | $313,314 | 1.20% | $3,760 |
| Kansas | $179,343 | 1.28% | $2,296 |
| New York | $379,457 | 1.30% | $4,933 |
| Michigan | $211,760 | 1.31% | $2,774 |
| Rhode Island | $379,785 | 1.37% | $5,203 |
| Iowa | $167,640 | 1.43% | $2,397 |
| Pennsylvania | $237,742 | 1.43% | $3,400 |
| Ohio | $184,247 | 1.52% | $2,801 |
| Wisconsin | $233,688 | 1.53% | $3,575 |
| Nebraska | $208,549 | 1.54% | $3,212 |
| Texas | $252,422 | 1.60% | $4,039 |
| Connecticut | $322,724 | 1.73% | $5,583 |
| Vermont | $303,224 | 1.76% | $5,337 |
| New Hampshire | $374,599 | 1.89% | $7,080 |
| Illinois | $237,462 | 1.97% | $4,678 |
| New Jersey | $415,066 | 2.13% | $8,841 |
How to find the property tax of a specific property
Investors can find assessed property value online by going to the county assessor’s or county appraiser’s website for the county the property is located. Some assessors also periodically update projected increases or decreases in property value looking forward two or three years, which can help make creating a profit and loss statement for rental property more accurate.
The percentage of property taxes paid by a real estate investor also depends on the county and city a rental property is located in.
Tips for lowering property tax assessments
For all practical purposes, there may not be a lot an individual investor can do to reduce the assessment ratio or millage rate a county assesses. However, there are several things an investor can do that may help to reduce the assessed value of a property.
Compare with similar properties
Many investors compare their assessed property value to similar homes in the neighborhood by checking the assessor’s website. If two similar homes have different assessed values, there may be an error in the way the county appraiser assessed the property’s value.
Review the assessor’s data to ensure it’s accurate
The assessor’s website will also list property details used to assess a property’s value. Data such as square footage, number of bedrooms and bathrooms, lot size, construction date and materials, and recent improvements all have an effect on how a home is valued.
By comparing the appraisal report from when the home was purchased to the information to what the assessor shows, an investor can quickly spot any mistakes, then immediately notify the assessor’s office of any errors.
Make improvements strategically
Investors make improvements and update to a property to force appreciation and raise the monthly rent. But improvements can also lead to an increased assessed value for property tax purposes.
Before making improvements, many investors check with the county assessor or contractor doing the work to ensure that the increase in rental income and property value will be more than any potential increase in property taxes.
Monitor curb appeal
Having the best looking home in the neighborhood can be something to be proud of, but a house that looks better than the rest may also lead to a higher assessed property value. A rental property should be nice enough to attract qualified tenants and match the other homes in the neighborhood, but going overboard on curb appeal could lead to a higher property tax bill.
Appeal the property tax assessment
Property tax assessment notices are usually sent out one or two months before property taxes are due, which gives an owner time to appeal the assessed valuation. The exact process for appealing an assessment varies from county to county, but generally requires an owner to submit evidence that the assessed value is incorrect.
Some investors also hire attorneys who specialize in property assessment appeals. However, investors may wish to compare the cost of an attorney to the anticipated reduction in property tax before spending money on legal fees.
Final thoughts
Property taxes are part of the operating expenses that come with owning a rental property. Taxes on property are used to fund public services and infrastructure improvements that can help to increase overall property values in the county. While the property tax rate may not be the deciding factor of where to purchase a home, investors take care to understand the impact that property taxes have on the return on investment a rental property generates.
