Nothing is certain, it is said, but death and taxes. And so, it goes that even with the tremendous tax advantages of Self-Directed Real Estate IRAs, they are not totally free of taxation, either. In addition to unrelated debt-financed income tax (UDIT), which we have written about here, Self-Directed Real Estate IRAs must also pay property taxes, which vary by county.
Since property taxes come directly out of Self-Directed Real Estate IRA profits, it is critical to take these costs into consideration when buying real estate properties and setting rent rates.
The state with the highest property tax burden, on average, is New Jersey, with an average property tax burden of $8,690 as of the end of 2017. That is up 1.6 percent compared to the previous year. In New Jersey, a home assessed at $300,000 would carry an average property tax of $7,200.
In contrast, the state with the lowest property taxes nationwide is Hawaii, where a home assessed at $300,000 would carry an $810 tax burden.
Do not worry: Hawaii will make up for it in its income taxes and generally high cost of living. And good luck finding a house in Hawaii priced at $300,000! (The median home price in Hawaii is well over $530,000).
According to recent reporting from the New York Times, the five states with the highest property tax burden are:
1.) New Jersey 2.40%
2.) Illinois 2.32%
3.) New Hampshire 2.19%
4.) Connecticut 2.02%
5.) Wisconsin 1.95%
Looking for the lowest average property tax burdens? Here they are:
1.) Hawaii 27%
2.) Alabama 43%
3.) Louisiana 51%
4.) Delaware 55%
5.) District of Columbia 56%
Nationwide, the average American household that pays property taxes spends $2,197 on property taxes each year.
A few special cases: Texas does not have a state income tax, but property taxes are among the highest in the country, with an effective average real estate tax rate of 1.86%.
Note that while income tax is charged at a higher rate, it is only on the income. The property tax is on the entire assessed value of the property every year. However, with a median home value of $142,700, and some of the hottest markets in the country, Texas remains a popular spot for Self-Directed Real Estate IRA investors.
Fortunately for many of our clients, none of the 15 most expensive property tax states are in the southeast. It is the northern homeowners that are taking the biggest beatings. North Carolina, where we have our offices, ranks among the 15 states with the lowest property tax burdens. North Carolina residents pay an average effective property tax rate of 0.88 percent.
Durham County has the highest property tax rate in the state, at 1.22%, while Watauga County has the lowest, at 0.42%. North Carolina Self-Directed Real Estate IRA investors can find a county-by county breakdown of property tax rates in North Carolina here.
But while high property tax rates are a burden for Self-Directed Real Estate IRA investors, they may represent an opportunity for those interested in investing in tax liens and certificates: Bigger property tax bills mean more people falling behind on property taxes, creating a potentially lucrative opportunity for investors to use their Self-Directed IRAs to pay the delinquent property taxes on the owners’ behalf and get a lien on the home – all the while earning an attractive interest rate on the loan.