A Brief Guide to Property Taxes for Real Estate Investors

A Brief Guide to Property Taxes for Real Estate Investors

For many Americans, investing in a rental property is one of the most enticing financial prospects available to them. The average American landlord will make about $70,000 this year from their properties. But being a real estate investor comes with a cost in the form of property taxes.

Besides mortgage payments and maintenance, you also need to account for your property tax bill when planning your investment strategy.

But that can be challenging because tax policy is complex and subject to change. So to help you make sense of it, we've penned this brief guide to property taxes for real estate investors to help you to better understand how to manage your obligations.

How Property Taxes Are Assessed

Your property tax obligation is somewhat subjective. It falls to an assessor from your local government to determine the approximate value of your property. Factors like location, improvements to the property, and whether it's in a homeowners association may affect their assessment.

You pay these taxes directly to your local tax assessor. You may pay a lump sum once each year, or have the option to pay monthly as part of your mortgage payment.

For real estate investors, it's important to know that property taxes are valued based on the land's "highest and best use". This usually means whatever purpose would be the most profitable. That estimated value is multiplied by the local tax rate to calculate how much you owe.

The type of investment property also makes a difference. Vacant lots, residential homes, and commercial properties all carry different values based on how much profit they could generate.

Property taxes can change over time. This can happen any time your property is reassessed. Governments can also raise or lower taxes, making your liability increase or decrease over previous years.

Minimizing Your Property Tax Liability

Like most taxes, there are ways to lower real estate taxes.

The most direct way is to seek a reappraisal. The National Taxpayers Union Foundation estimates that 30 to 60 percent of properties are over-assessed. If you think this is the case for you, you may appeal your assessor's appraisal.

Tax deductions are the second major avenue for lowering your liability. Though don't always apply to investors, some programs offer deductions for seniors, veterans, or persons with disabilities.

You may also have the ability to deduct your mortgage interest from your tax bill. Situations vary, but if you have that option it's one of the best ways to lower your tax bill relative to the return you can make off your investment.

Managing Your Responsibilities as a Real Estate Investor

While investing in real estate can be a great way to build wealth and generate passive income, it's not a hands-off venture. Paying property taxes is only one aspect that the property owner is responsible for.

Being a successful investor means maintaining the property, marketing the whom to potential tenants, and screening applicants for their suitability. It's a lot for a first-time investor to deal with.

That's why many independent landlords rely on a property manager to handle the day-to-day responsibilities. To see why this approach is so appealing, check out these benefits of hiring a Sumter property manager.

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