Property taxes are unavoidable if you own real estate in the United States, but it doesn’t have to be the end of the world if you want to find ways to legally avoid paying property taxes. While there’s no way to completely get out of paying property taxes, there are a few legal ways to pay less and keep more of your money. Here are some ideas on how to avoid paying property taxes legally in the United States.
How to Legally Avoid Paying Property Taxes
You don’t have to be an accountant or a tax lawyer, but it’s a good idea to know something about tax laws. After all, you want your money working for you. If you use it well, your savings will eventually grow into enough of a nest egg that you can retire comfortably—and leave your work worries behind.
Tax fraud penalties
The penalties for tax fraud vary depending on how much money you stand to gain or lose. The loss amount is calculated by subtracting any legitimate deductions from your gross income and multiplying by 25%.
For example, if you earned $100,000 a year but didn’t report $25,000 of it (so your reported income was $75,000), then your fraudulent loss would be $25,000 x 25% = $6,250.
The maximum penalty for a fraud charge is 75% of your underreported income—or 50% more than what you could have gotten away with reporting if you hadn’t filed a false return.
The legal ways to reduce your tax bill
There are two main ways to reduce your tax bill: exemptions and deductions. Exemptions generally give you a dollar-for-dollar break on taxable income by reducing your taxable income.
For example, if you were taxed 10 percent on $100,000 of income and had an exemption of $10,000, you’d only be taxed 10 percent on $90,000 of income.
The problem with exemptions is that they’re pretty limited; for the 2015 tax year, there are a few key exemptions—such as those for the head of the household status or being a dependent—that offer significant savings but aren’t available to most taxpayers.
If you are doing everything legally, your tax bill is still high.
First, look for deductions and tax credits that might lower your bill. If you don’t have kids or own a home, you may qualify for a larger deduction than most homeowners; you are married but file separately, live with roommates, or work from home as an independent contractor.
The IRS also offers generous tax breaks to owners of renewable energy sources and those making green improvements to their homes, like installing Energy Star appliances. If you pay mortgage interest on your first home (the residence where you live most of the time), get some peace of mind by claiming an itemized deduction.
It lowers your taxable income by lowering your standard deduction—and that could mean an additional break from paying too much in property taxes.
What if your Income is Really Low?
The rules vary by state, but if your income is low enough, you might be able to get your property tax bills waived. In Florida, for example, if your annual household income falls below $12,000 a year ($3,600 for individuals), you qualify for a Property Tax Deferral Program. Also known as a homestead exemption or seniors exemption, it works like so.
You pay all of your current year’s property taxes (and any of last year’s that haven’t been paid yet). Then wait for an amount equal to what you would have owed otherwise back from state coffers.
Many charities can help—especially seniors—if you’re willing to apply when it comes to avoiding out-of-pocket expenses for anything else.
Legal ways to reduce your tax bill even further.
Property tax is generally a percentage of the value, so there are a few ways to reduce it below that amount. Instead, if you don’t have more than $20k in personal property, take advantage of exemptions like vehicle (total value <$3k), retirement accounts ($6k), and life insurance ($10k).
Your home might be your biggest asset and most expensive tax bill, but real estate has some of its tax savings, if you’re married and filing jointly with a combined income under $142k, you qualify for certain write-offs.
Frequently Asked Questions
What are my options for avoiding real estate taxes?
In a 1031 like-kind exchange, owners can avoid taxes by selling a real estate investment and buying another property. Property owners might use the cash in their current home to make other purchases.
Which properties are excluded from paying property taxes?
Exemptions from property taxes are not limited to primary houses. Property tax exemptions are available to qualify religious institutions, nonprofit organizations, government structures, and other properties.
In the United States, which state has almost no real estate taxes?
Unfortunately, no state does not levy a property tax; Property taxes continue to be an important source of revenue for the state. Tax dollars are used to run and maintain vital government services such as law enforcement, infrastructure, and education.
The great irony of property tax is that while it is technically a form of income tax, many states let you pay off your home by adding a certain amount each year to your taxable income. You can use these payment plans anytime during your ownership of your home.
If you make your monthly mortgage payments on time and include a little extra each month as part payment, you could eventually pay off much or all of your mortgage debt and build equity faster than you otherwise would have.
Instead of interest accumulating on a loan for 30 years or more, some or all of that interest is paid each year during ownership and reducing what’s owed when it comes time to sell.
Sheena Whitlock, a property expert, and blogger with over 15 years of experience in the field. The knowledge and skills Sheena has acquired during her career have given her invaluable insight into the property management business.
She has done her Property Development BSc (Hons) from the University of Portsmouth and completed her Master’s Degrees in Property Management from the University of Chicago.
As a professional, she has spent time working for various companies as a property management officer and currently works at Asset Info Hub where she shares her knowledge and experience on various property matters with people around the world, questioning their queries via blogging and virtual consulting services.