Despite the growing popularity of investing in cryptocurrencies and digital assets, more and more people are shifting their focus toward the real estate market, looking for investment properties to hold for long-term appreciation or generate rental income, with the latter receiving greater regard. And given the increased emphasis on financial security going into 2022, both seasoned investors and young, aspiring entrepreneurs are diversifying their current portfolios to include the cash flows offered by rental properties.
However, despite the opportunities present in the real estate market today, a common issue shared by all rental property investors is the management of property taxes, particularly how this expense can hurt their bottom line and limit their ROI margins. And to help spread awareness on the subject matter and guide investors in making better financial decisions, we will be going over some of the actionable steps and policies that can work to your tax advantage.
Monitor Your Property Additions Vs. Repairs
Typically, it might seem obvious to invest in home improvement projects to improve the living conditions and maximize the curb appeal of a rental property, but while that may attract more potential tenants, it almost often results in more property taxes as well. Therefore, we strongly recommend that you monitor and identify all property additions and repairs made during the current year because knowing the difference between the two might just land you in more favorable property tax levels.
- Assessed Home Values Reflect Tax Rates: To put things into context, although many states may practice different policies and regulations regarding property taxation laws, your tax rates will reflect the assessed home value determined by a professional assessor. And given the astronomical rate at which home prices have been increasing the past few years, only recently cooling off with the market sentiment, you can expect a proportionate increase in due taxes as stricter government regulations start to address current inflation concerns. Therefore, you might want to limit property additions that can be capitalized, like major renovations and landscaping projects.
- Repairs Are Tax-Deductible Expenses: On the topic of repairs, you can’t expect assessors to know all the details concerning a recent renovation versus minor repairs, which could reflect your disadvantage on the tax rates. And because many minor repairs to maintain current utility and function are recognized as business expenses, these can be netted against your rental income as a write-off. Furthermore, it is also in your best interests to include other costs that are tax-deductible, such as insurances and utilities, to maximize your profit gained.
- Research Comparable Homes Near You: Last but not least, the rental property’s value and the visual appeal are always contrasted by neighboring homes and adjacent properties, wherein less attractive ones can affect the value. Likewise, if your neighborhood is among the few places that have experienced limited housing starts and developments, this could also bump the price and make it more valuable due to location. Therefore, we recommend reviewing any comparable homes near you to spot out discrepancies that you can use to lower your property taxes.
Practice Due Diligence And Investigate
Apart from learning the ins and outs of your rental property’s assessed value and working the financial aspects of lowering your property taxes to their proper amount, we suggest you practice due diligence and investigate the matters in your own time as well. You see, there’s also the risk that there exists deviations or miscalculations on the part of meeting your property taxes, which you should appeal and take appropriate civil action to resolve.
- Look Into Your Property Tax Card: Firstly, your most urgent priority when practicing due diligence to look for mistakes related to too-high property taxes and reducing them to an acceptable amount is looking into your property tax card. Sometimes, these can represent erroneous dimensions and facts regarding the property that warrants a re-evaluation on the part of the assigned assessor. As a result, your few grievances can be easily fixed by looking into the details.
- Work With A Legal Team For An Appeal: Secondly, if you encounter any further issues and reasonably believe that you deserve lower property tax rates on the rental, we recommend working with a legal team if the assessment office is uncooperative. Yes, this will require upfront costs, but it will help you save more money in the long term. Plus, if you’re dealing with rental properties situated in different states, they will take care of filing a foreign subpoena, preparing settlement terms, and many more to streamline the process.
Maximizing Rental Profits Requires A Firm Grasp Of Property Taxes
Overall, even if you’re entering the real estate market to generate another source of income through rentals, a firm grasp of how state property taxes work will help maximize your earnings potential. So, before jumping the gun on any investment decisions, we recommend investing the necessary time and effort in learning the basics to better prepare you for any financial or legal challenges along the way.