Self-directed Real Estate IRAs are an extraordinarily powerful concept. No other vehicle gives you the same combination of current income (to your IRA, anyway!), potential for capital appreciation, leverage, downside security (real estate may rise and fall but it doesn’t often go to zero like a stock can!), asset protection and tax deferral.
But the Self-Directed IRA doesn’t defer all taxes – just income and capital gains taxes. Real Estate IRA investors are still responsible for property taxes, and they have to be paid every year.
As a result, Real Estate IRA investors should be keenly sensitive to the property tax environment. No, you don’t want them to be zero: Good schools, infrastructure investment and city and county services are an important part of the value proposition for most developed areas. But you must account for property taxes and maintain enough liquidity within your IRA to pay them. They’re also an important part of profit and cash flow projections for any investment property.
Are you living in a Property Tax Purgatory? Here are the top five worst states from the point of view of the property tax-sensitive investor:
1.) New Jersey. The Garden State saddles homeowners with an average property tax of 1.89 percent of home values each year. Since homes tend to be expensive in much of New Jersey – almost $350,000, on average, statewide – that’s a pretty chunk of cash the Real Estate IRA investor needs to carve out every year.
The honor of the highest-taxing borough within the state goes to Tavistock Borough.
2.) New Hampshire. The Granite State comes in with the 2nd highest property taxes in the county, with an average take of 1.86 percent of home value per year. However, the high property tax rates are substantially balanced out by the lack of a state income tax and the lack of a state sales tax – which not only puts more money in your pocket if you live there, but also helps buyers and renters qualify for that much more.
3.) Texas. Ranked as a percentage of home value, Texas property taxes are the third highest in the country, at 1.81 percent per year. The average home value is much lower than the national average ($125,800 per year, according research by USAToday), but that’s not unexpected: Texas has a lot of land!
Fort Bend County has the highest property tax rates in the state, with Tarrant and Williamson County close behind.
Like New Hampshire, though, Texas does not have an income tax, and so depending on how your life and finances are structured, Texas could work out quite well for you – especially if you are drawing current income from your portfolio that would be subject to state income tax elsewhere.
4.) Wisconsin. Property doesn’t come cheap for badgers. Wisconsin has the 4th highest property taxes in the country at 1.76 percent, though with a modest average home value of $170,800. Milwaukee County is the priciest county in the state.
5.) Nebraska. Nebraska comes in fifth, charging property owners 1.70 percent of the property value of the home, though the price levels are comparatively low, with a median home value of $123,300. The highest-tax jurisdictions in the state are Clay County and Grant County.
Rounding out the top-ten:
Illinois, a well-known “tax hell,” charges homeowners 1.73 istanbul housing percent of home values each year. It also has relatively high income and sales taxes.
Connecticut counties charge an average of 1.63 percent of home values per year.
Michigan charges 1.62 percent – on a substantially lower price level than it had just a few years ago, thanks to the Detroit Effect.
Vermont property taxes clock in at 1.59 percent. Unlike New Hampshire, Vermont will also hit you with an income tax as well.
North Dakota charges homeowners 1.42 percent of home values per year. But thanks to the oil sands boom property is also booming, unemployment is the lowest in the country and incomes have been rising rapidly. So given the overall economic climate in North Dakota, well, you know could do a lot worse than that, ya, you betcha.