Property taxes in Indiana are a bite, equal to 1% of the value of the home. That’s if you qualify for a homestead exemption, however. Other property is taxed at a rate of 2-3% of the market value each year.
A homeowner who owns a $100,000 home would pay $1,000 in taxes, plus local, voter-approved adjustments.
However, the same person who rents a home worth $100,000 would effectively pay $2,000 in annual property taxes.
Indiana, being as conservative as it is, is all about running a surplus. You can thank my man Mitch Daniels, who should, without question, run for president. Unfortunately, he won’t.
Indiana runs big state surpluses because taxes come in at a rate of:
- 3.4% flat for earned income.
- 1% property taxes on your homestead
- 2% on rental property
The difference in property taxes helps explain why pre-tax cap rates are so high. If you borrow at 4% and earn unlevered, gross returns of 10%, the spread comes to 6%. Once you bake in the exorbitant property taxes, though, the spread shrinks by one-third to a 4% return on tangible capital.
Said another way, the state and local governments make half as much (2% annually) as an investor would (4% annually) with no capital at risk. Man, it’s good to be a government.
Why should renters pay more?
This tax strategy is interesting for a few reasons. It is:
- Horribly regressive – People who rent generally earn less than people who own a home, so a higher tax on rental property taxes poorer people at a higher rate.
- A reason to buy a home – Why pay for 2% property taxes on rental property when you can pay 1% on a home you own? The savings can easily top $100 per month. (We have cheap real estate.)
- A tax shuffler – I’d venture to guess that only a fraction of renters know that property taxes are higher on rental property than residential property. Homeowners are probably more likely to vote, so any government has incentive to make their taxes as low as possible.
- Cost deflecting – Come temporarily live in flyover country, where we’ll nickle and dime you on embedded property taxes without you ever knowing!
If there’s anything I’ve learned over time, it’s that accountants and lawyers are worth their weight in gold. Local laws and state income tax codes are a tangled web of ridiculousness passed through the hands of power-hungry and revenue-thirsty people.
Does your state or municipality employ similar tricks to push around tax revenue?