How States Without Property Taxes Offset Costs: Sales Tax, Income Tax, and Other Strategies

As a real estate investor, you always seek ways to maximize returns and minimize costs. One factor that significantly impacts your bottom line is property taxes. These taxes, which fund essential local government services, vary drastically from state to state. 

While no state completely eliminates property taxes, some offer significantly lower rates or exemptions, making them attractive for real estate investment. But how do these states make up for the lost revenue? 

This guide explores the alternative strategies they employ – like sales tax, income tax, and others – and how these can affect your investment decisions.

What are property taxes?

Let’s start with the basics. Property taxes are taxes levied on real estate and, in some cases, personal property. You typically calculate them as a percentage of your property’s assessed value—the estimated market value determined by your local government.

Residential properties (single-family homes), commercial properties (office buildings, retail stores), and industrial properties (factories, warehouses) are all subject to property taxes.

According to the Tax Foundation, the average property tax bill in the US is $1,815, ranging from under $250 in some counties of Alaska, Louisiana, and Alabama to over $10,000 in California, New Jersey, and New York.

Furthermore, the average property tax rate by state is 0.914%, while the median property tax is 0.76%.

Property tax represents 30% of state and 72.5% of local tax collection. This revenue is crucial for funding public services that directly impact your investments. Think school districts, infrastructure (roads, bridges), and emergency services (police, fire departments). These services and infrastructure contribute to a higher quality of life, increasing property values, attracting tenants, and boosting your rental income.

Property taxes vs. real estate taxes

You might hear the terms “property taxes” and “real estate taxes” used interchangeably, but there’s a subtle difference. Real estate taxes refer specifically to taxes on land and buildings – what we typically consider “real property.” Property taxes, on the other hand, can be broader. Some states also include taxes on personal property like cars, boats, or business equipment.

How states offset the loss of property tax revenue: Implications for your investments

States that minimize or offer exemptions for property taxes need to find other ways to fund government services. Understanding these alternative revenue streams is vital for real estate investors because they can significantly impact your overall profitability.

Sales tax

Sales tax is a common way for states to generate revenue. This includes general sales taxes on most goods and services and selective sales taxes on specific items like gasoline. States with the lowest property taxes might have higher sales tax rates to compensate.

For example, if you’re a business owner in South Dakota, you won’t pay personal property, corporate income, or personal income tax. However, it has a higher-than-average local sales tax rate of 1.9% compared to the national average of 1.5%. Things get worse in places like South Carolina and Nevada, where some of the lowest property tax rates are offset by combined state and local sales tax rates of 7.80% and 8.24%, respectively.

As an investor, this can translate to higher operating expenses (for repairs, maintenance, etc.) and potentially lower tenant disposable income, which could affect rental rates.

Income tax

State income taxes are another major source of revenue, representing almost 38% of state tax collections.

These taxes are levied on individual and corporate income, with rates varying across different income brackets. Alaska doesn’t charge income tax; Florida only charges corporate income tax at a 5.5% rate. South Carolina also offsets its low effective rate on property with a relatively high 5% corporate income tax.

Higher state income taxes can reduce real estate investors’ profits from rental income and potentially affect their overall investment returns.

Excise taxes

Excise taxes are usually “sin taxes” on specific goods or activities. Common examples include taxes on alcohol, tobacco, and gambling. While not a primary source of revenue, excise taxes can contribute to a state’s budget without substantial property tax revenue.

That said, Rhode Island recently phased out a 7% excise tax on motor vehicles in 2023. Conversely, Texas has an 8.25% excise tax on alcoholic beverages served at bars.

Although the impact on real estate is often indirect, high excise taxes can influence an area’s economic climate and potentially affect property values. If you’re starting a new venture, choosing the right business name can play a significant role in establishing your identity.

Other Strategies

States employ various other business strategies to generate revenue, and these can have specific implications for real estate investors:

• Property transfer taxes: Levied when property changes hands.
• Estate taxes: Taxes paid on the transfer of property after someone’s death.
• Severance taxes: Taxes paid for extracting natural resources like oil and gas (relevant if you invest in areas with these industries).
• Tourism taxes: Taxes on hotel stays, rental cars, and other tourism-related activities (important if you’re involved in vacation rentals).
• Fees for state services: Charges for business licenses, professional registrations, etc.

RentRedi can help you track these costs and simplify the accounting process for smoother transactions.

Weighing the advantages and disadvantages: Is a no-property-tax state right for your portfolio?

Investing in states with low or no property taxes seems like a no-brainer, right? Well, it’s not always that simple. While there are definite perks, there are also potential downsides to consider.

Advantages

• More competitive rental rates.
• Increased property values.
• Lower operating costs.

Disadvantages

• Higher taxes elsewhere to offset lost revenue.
• Potential limitations in public services.
• Possible hidden costs.

Property taxes by state 2024: Where to find the lowest rates

To help you make informed investment decisions, here’s a quick overview of the ten states with the lowest effective annual rates on real estate in 2024:

State	Effective Tax Rate
Hawaii	0.26 %
Alabama	0.36 %
Nevada	0.44 %
Arizona	0.45 %
Colorado	0.45 %
South Carolina	0.46 %
Idaho	0.47 %
Utah	0.47 %
Delaware	0.48 %
Tennessee	0.480%

It’s important to note that a lower rate doesn’t necessarily translate to a lower property tax burden. It also depends on the median home prices in the state.

States without Property Taxes in 2024: Explore Your Options

While no state entirely eliminates real property taxes, some offer significant exemptions or reductions, making them worth exploring for real estate investors.

States with no personal vehicle property tax

Several states don’t impose personal property taxes on vehicles, including:

• District of Columbia
• Delaware
• Hawaii

This can be a plus for tenants, lowering their annual taxes and overall cost of living.

States without property tax for seniors

Many states offer senior citizens property tax exemptions or reductions, often with age and income restrictions.

For instance, in New York, property owners aged 65 or older with an income below $58,400 can qualify for 5% to 50% property tax relief on their primary residence. The State of Colorado has the fifth-lowest property tax rate and entirely exempts senior citizens from property taxes on their primary residence.

These tax policies can make your properties more appealing to senior tenants, a growing demographic in the real estate market.

States without property tax for disabled veterans

Numerous states provide property tax exemptions for disabled veterans, recognizing their service and sacrifice.

These exemptions often have specific eligibility requirements related to the level of disability. For example, West Virginia only provides tax credits to veterans considered 90-100% disabled by the Department of Veterans Affairs.

Other exemptions to state property taxes

Keep an eye out for other exemptions that can create investment opportunities:

• Commercial or industrial exemptions
• Homestead exemptions
• Agricultural exemptions.

By strategically targeting areas with these exemptions, you can potentially find properties with significantly lower tax burdens.

Navigating the tax landscape: Maximize your real estate investments with RentRedi

Understanding the nuances of property taxes and alternative revenue streams is crucial for real estate investors. While the prospect of “states without property tax” is appealing, the reality is more complex.

By carefully weighing the advantages and disadvantages, researching specific state tax laws, and considering how different tax structures impact your investment goals, you can make informed decisions to maximize your returns.

Looking for a streamlined way to manage your rental properties and stay on top of your tax obligations, no matter where you invest? Explore how RentRedi can simplify your operations and boost your bottom line.

From tracking income and expenses to generating tax reports, RentRedi provides the tools you need to succeed. Try RentRedi today!

Vergine Melkonyan, Content Writer / Marketing Specialist

Experienced in writing SaaS and marketing content, helps customers to easily perform web scrapings, automate time-consuming tasks, and be informed about the latest tech trends with step-by-step tutorials and insider articles.