Where Not to Rent a Home (Indiana)

by JT McGee

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.

What?

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:

  1. 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.
  2. 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.)
  3. 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.
  4. 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?

{ 2 comments… read them below or add one }

American Debt Project July 10, 2013 at 21:19

The tax rate for earned income is 3.4%?!! That’s pretty good, CA pays 10.3% at the “highest tax bracket” which starts $46-freaking-thousand. I dream of cheap real estate, most of the places I have lived (DC, Jersey and Cali) all have expensive real estate that in most cases made renting the more attractive option- why buy a $400K condo when you can rent one for $1,500? As for tax revenue, the only thing I really know about are bonds in California- cities, transit agencies and sometimes other public agencies will put huge construction bonds on the ballot (usually $100 million+) and they are paid through additional property taxes in the city/county (usually comes out to less than $20/yr at increase for life of the bond, at $100 mil) or in the case of Measure R, additional sales tax in the county (usually a half-cent). That’s why some cities in LA have a 9.5% sales tax which is crazy!

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JT McGee July 10, 2013 at 21:57

And here I am thinking 3.4% is really high. It adds up quickly. I mean, you hit the first federal bracket which is basically chump change, and then you have 15.3% in FICA/Medicare fun + 10% federal + 3.4% state. So, boom, surpass $500/mo in income as a self-employed single person and you already enjoy nearly 30% marginal taxation (yeah, yeah – Social Security and Medicare will totally be there when I’m older). Hit 28% and your marginal dollar looks more like Kennedy than it does Washington. Point taken, government. Capital gains are better than earned income. Noted.

Sales tax is 7%, I think, which already grinds my gears. I don’t know how your state and local governments can even begin to justify ridiculous state/local income and sales taxes. I guess that’s why salaries are so much higher…workers hardly see any of it.

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