5 Truths About Property Taxes And Real Estate
By Paul Esajian on June 1, 2015
What’s the real deal with property taxes and real estate investment today?
There are a lot of myths about property taxes out there. Taxes are often ignored and pushed to the back burner by real estate investors, but others that take them head on can find ways to mitigate them, and create extra profit in their deals and passive income portfolios. So what do real estate investors need to know about property taxes and investing?
Five truths all property investors should know:
- We Can Live without Property Taxes
We’re constantly told that we need annual property taxes. We are told that local services just can’t be sustained without them. Forbes even recently posted a controversial propaganda piece on why we should even learn to love property taxes. But Property Tax Adjusters, Ltd. in NY just highlighted that many of the world’s most luxurious destinations and hot real estate markets don’t have annual property taxes. This includes Dubai, Monaco, and others. They seem to be doing just fine. Even better. And those that don’t like the high property tax rates where they live will find other states and areas might offer lower ones. For example; while New York and New Jersey have outrageous property tax bills, those in states like Alabama, Hawaii, Delaware, and Louisiana, have very low tax rates according to Market Watch. While so far unsuccessful; North Dakota has even been trying to ditch property taxes all together.
- Paying Property Taxes is Still Better than Renting
The truth is that we never get to own our homes ‘free and clear’ in America. Annual property taxes mean that we are all effectively renting forever. But it is obviously far better to be able to reduce your housing costs to a few hundred or a few thousand dollars a year, than paying that much on someone else mortgage each month. This is also why it makes sense to keep rental homes leveraged to some degree. If you can maintain positive cash flow, have a cushion for emergencies, and can borrow cheap to put that money to work for higher returns, then do it.
- You are Probably Paying too Much in Property Taxes
Few think to question their property tax bills. That’s why so many are taken advantage of. In New York public officials admit that around 48% of property owners are overbilled each year. But that doesn’t mean local taxing authorities automatically hand out refunds. In fact, many would argue that complex systems and new assessment tactics and timelines are specifically used to get people to overpay. Those that have seen values decrease in the last few years, or have had properties damaged can be especially prone to overbilling. Still whether it is billing errors or faulty tax assessments many are entitled to demand their bills gets reduced each year, and maybe even get refunds. If you don’t claim yours expect to keep getting overbilled.
- You Can Lower Your Property Taxes
The good news is that you can lower and correct your property tax bills. In some cases, real estate investors can directly challenge their taxes themselves. Others may want to recruit the help of a local tax adjuster. Beyond just getting bills corrected and demanding refunds, there can be strategies for reducing taxes going forward. Property modifications and other tactics can help investors to legally reduce taxes and other holding costs. Don’t neglect this. It may not be as appealing as heading off to land a giant new deal. But this can add high single and even double digit net returns and improvements to cash flow each year.
- Property Taxes can be offset with other Tax breaks
Savvy real estate investors take taxes on. Often they even consider taxes first when making any investment. Smart strategizing upfront can not only offset property tax bills, but can even generate more cash flow and net returns. This can easily add double digits to returns each year, and far more when compounded year after year. Self-directed IRAs are one of these great tools. There are also 1031 exchanges, and other entities and tax saving vehicles which can be utilized in similar ways.