Tax rates vary based on where you buy. It’s a given that certain states and municipalities charge a higher tax rate than others, so before you purchase a vacation spot in a swanky mountain town, investigate how much you’ll have to pay annually in property taxes.
In Park City, Utah, for example, people who own a secondary home in the popular ski destination pay roughly twice what full-time residents pay – 1 percent of the property’s value annually.
While locally the tax hit for owning a vacation home may seem high, some individuals purchasing those vacation homes see the tax rate as low compared to where they live year-round, says Ben Fisher, a Realtor for Summit Sotheby’s International Realty in Park City. “Most people are in New York or California, where they have pretty high tax rates,” he says.
The states with the lowest effective real-estate tax rate in 2016 were Hawaii (0.28 percent), Alabama (0.43 percent), Louisiana (0.48 percent) and Delaware (0.53 percent), according to WalletHub, which calculated the rates by dividing the median real-estate tax payment by the median home price in each state. The same list showed the states with the highest effective real-estate tax rate are New Jersey (2.29 percent), Illinois (2.25 percent), New Hampshire (2.1 percent) and Wisconsin (1.97 percent).
If you’re purchasing outside the country, rather than paying significant real estate taxes you might instead pay a one-time fee. Nuri Katz, president of Apex Capital Partners, a boutique investment advisory that regularly assists individuals investing in property abroad, says many Caribbean islands require a one-time stamp tax that varies based on the other types of taxes each country charges, with small annual property tax rates of around 0.1 percent.
You might be able to deduct your mortgage interest. Federal tax rules allow for deduction of mortgage interest paid on two residences, allowing you to deduct interest for your primary residence and vacation home at the same time.
“If you’re buying a second home and you’re going to finance it, you can deduct the interest on it for federal tax purposes,” Mariner explains. “And most states will tend to follow the federal rule … but it’s only up to $1 million of valuation.”
Don’t forget about future tax increases. A smart real estate investment means the property’s value will rise, meaning a bigger payoff when you decide to sell. But in the meantime, don’t forget about the cost that comes with a higher-value property.
“Think about not just the impact today but the annual increase in appraised value – or assessed value – that will also affect the property tax rate,” Mariner says.
If you buy in a hot market or an area seeing a lot of development, don’t be surprised ifproperty values increase significantly as more people purchase and demand grows. Once your property is appraised for a higher value, the amount you’re expected to pay in taxes will increase accordingly.
It’s also possible the property tax rate will increase in the future. Mariner notes that the potential for federal budget cuts under the next White House administration could lead states to search for alternative ways to make up where federal funding stops.
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