Real estate taxes can have a significant impact on your returns as a real estate investor. And depending on where you own property, your tax rate can vary widely.
There are many lists out there listing tax rates by state, but they don’t exactly tell the full story.
There are two levels of property tax (in most places). First, you have your state taxes. States like New Jersey and Illinois top the list with tax rates of around 2%. Most western states have much lower tax rates – typically less than 1%.
These lists aren’t wrong, but they don’t cover a pretty big piece of the puzzle: local taxes. States are not the only bodies that can levy taxes on property; Counties and cities can do that too. To get the most accurate picture of what taxes are due in a particular city or state, you need to consider local taxes – and that is exactly what I did.
I took the taxes actually paid on a property and then divided that by the property’s valuation (which is what we estimate for the property’s value). I do this because the data from the last sale is years old and therefore likely to be less accurate. I then aggregated this data by state and then by city.
Using the BPInsights database, I have summarized the actual taxes paid on almost every single property in the country. This combines both state and local taxes into one number that I’ve plotted for you all on one map below.
As you can see, the western and southern states typically have the lowest effective tax rates, while the Midwest and Northeast have the higher effective tax rates. At the upper end of the spectrum is Connecticut, which according to our analysis has the highest rate at 3.81%!
State searches are helpful and fun and all, but if you want an accurate picture of what taxes you would pay on a potential property, you need to do more local research.
You can scroll through the data below to browse the 500+ largest markets in the United States
While no one gets upset about paying taxes, having dirt cheap taxes isn’t necessarily a net benefit. It will help your cash flow, that is undeniable. But it could potentially hurt the appreciation.
Taxes are used to fund things like public schools, community services, and infrastructure, all of which affect the quality of life in a city. These things will affect property values over time, which is to be considered.