In the US, property taxes are an integral part of real estate. But who’s responsible for paying them? That’s a question that often spurs confusion - and this is primarily because it's not always clear what property taxes actually are. You may even notice that “Do tenants pay property taxes or landlords?” is a common search query online.
The thing is, if you’re a landlord in charge of a residential rental property or you work in commercial property management, you need to be informed about property taxes. Don’t stress: we’ve got you covered in this blog that details everything you need to know about property taxes and tenants as a landlord.
So, What Is Property Tax & What Is It For?
Essentially, property tax is a local tax imposed by local governments at the municipal and county levels. And it's not just another tax to stress over in tax season. It's actually a vital revenue that shapes communities, as it provides funds for maintaining the roads, schools, police and fire departments, as well as helping to support local parks and libraries.
Okay, so, who sets the amount of property taxes we pay? Local taxing authorities determine the tax rates and they’re set based on the budgetary requirements necessary to fund public services. Typically, this involves the following steps:
- Local governments decide how much revenue is needed to fund public services and infrastructure for the coming year.
- The tax rates, often called “millage rates”, are calculated based on the total assessed value of all taxable property in the jurisdiction.
- Tax rates may require approval by local governing bodies, such as a city council, or through voter referendums in some cases.
- Local assessors determine the value of each property, which is used to calculate the tax owed based on the established rate.
This process ensures that property taxes are closely tied to the needs of the local community. By funding essential services like schools, public safety, and infrastructure, they help maintain the quality of life and keep neighborhoods functional and desirable.
Who Is Responsible for Paying Property Taxes?
So, now we get to the nitty-gritty of who’s liable for paying property taxes. It’s typically the landlord’s sole legal responsibility to pay them as part of the obligations of being the owner. Conversely, a tenant is not directly responsible. That said, tenants do indirectly contribute through the rental income that they provide to the landlord or property management company. There is one small stipulation here, as we'll talk about below.
Typically, landlords incorporate their property tax expenses into the rent they charge. In this way, tenants may indirectly end up covering some or all of the landlord's property tax bill (if you want to get technical).
What Is Depreciation and How Does it Affect Your Taxes as a Landlord?
If you’re experienced in property management, you will likely already know about depreciation, but for those who are unfamiliar, here’s how it breaks down. Depreciation is an accounting method that allows landlords to recover the cost of wear and tear on a rental property over time. In the context of your taxes, depreciation serves as a valuable tool that offers you significant tax savings.
How Depreciation Works
The IRS permits property owners to depreciate the value of their rental property over 27.5 years for residential properties and 39 years for commercial properties. This depreciation deduction applies to the building itself (but not the land), essentially because the land itself is not subject to wear and tear.
For example, if you have a residential rental property (excluding land) that’s valued at $275,000, you can claim $10,000 each year in depreciation ($275,000 ÷ 27.5). What this does is reduce your taxable income as a landlord, thereby lowering your overall tax liability.
Do Tenants Ever Pay Property Taxes Directly?
Earlier we mentioned that property taxes are usually the responsibility of the landlord. There’s a reason for that, as there are some rare circumstances when renters pay property tax instead of the landlord:
- Triple-Net Leases - In commercial real estate, tenants with a triple-net lease (NNN) agree to cover property taxes, insurance, and maintenance costs in addition to rent. This arrangement shifts much of the financial burden to the tenant.
- Special Lease Agreements - In some cases, landlords and tenants negotiate lease terms that require tenants to pay property taxes directly. However, this is something that typically only occurs in commercial agreements.
- Homeowners Associations (HOAs) - For tenants renting properties in communities governed by HOAs, property tax costs may be reflected in the HOA fees paid by the landlord. Landlords might pass these costs onto tenants in the form of higher rent.
If you’re a landlord, structuring leases to manage property tax obligations is essential. That’s because clear agreements, especially in NNN leases or HOA scenarios, can reduce the chances of disputes and it protects your bottom line.
Frequently Asked Questions on Property Taxes
Q - How can landlords prepare for property tax increases?
A - As a landlord, you can handle rising taxes by keeping an eye on property value reassessments, setting aside savings for tax bills, and working with tax professionals to identify potential deductions. Most jurisdictions automatically reassess property values every 1, 3 or 5 years.
Q - Are there tools landlords can use to forecast property tax changes?
A - Yes, tools like real estate platforms, tax assessor websites, and rental property management software like TenantCloud can help. While TenantCloud doesn’t forecast tax changes directly, it offers tax preparation reports and financial tools that aid in planning.
Q - What should landlords consider when investing in areas with high property taxes?
A - Evaluate rental demand, potential tax incentives, and long-term appreciation to ensure the investment justifies the higher tax burden.
Q - Is there anything I can do if I feel my taxes are too high?
A - Yes, you can appeal your property taxes if you believe yours have been overassessed. Successful appeals can lower your tax bill. Just be sure to weigh up the costs and effort involved to ensure it’s something worth pursuing.
Q - Can I claim deductions for property improvements required by local laws?
A - Yes, you can. Costs for mandated upgrades, such as improvements in energy efficiency or safety, are often tax-deductible if you properly document them.
Q - How can I make sure I pay my property taxes on time?
A - Failure to pay on time can result in financial penalties or worse. As such, you should use TenantCloud’s Calendar feature to track due dates. It’s also a good idea to automate your payments to ensure nothing gets missed.
Understanding Your Obligations as a Landlord in the US
So, there we have it - everything you need to know about your property tax obligations as a landlord or property management professional in the USA. To recap, in most cases, it’s the landlord who’s going to pay for this tax, although not always. As we’ve covered, there are also some cases in which the renters pay property tax.
Staying organized and well-informed on matters like this is vital for landlords, as a lack of understanding tends to lead to problems. A great way to manage your responsibilities is to make use of the TenantCloud platform which makes everything easier to keep track of.
Automated date reminders, expense tracking and tax preparation reports are just a few of the features that make your life easier. To find out more, browse our website or if you’re interested in more helpful articles like this one, head over to our blog section today.