The vacation rental industry is growing yearly, and annual revenue in the U.S. alone is expected to hit $20 billion by 2025. This trend is partly thanks to OTAs (online travel agencies), such as Airbnb, Vrbo, and Booking.com, who list thousands of vacation rentals and market them to a global audience.
If you’re considering acquiring a new property to start or scale your short-term rental business, you should bear in mind that many vacation rentals are subject to various taxes depending on location and property type. Do you want to know more? Let’s dive right in!
What is property tax?
Property tax is a tax that property owners are legally bound to pay, and in most states, it is collected by the county. The type of property liable to property tax varies by jurisdiction; for example, an office building or farming assets may be exempt in certain areas. The finances generated are often reinvested into the local community and services such as education, infrastructure, and leisure facilities.
As a prospective buyer, it’s important to consider this before investing, as it may significantly impact your finances.
How is property tax calculated?
Property tax is calculated based on which state you invest in and the overall value of your property. Moreover, local governments take into account numerous other factors, such as the proximity to local services, land development potential, and your average rental term.
To get a more accurate picture of your tax rate, find out your county’s mill levy—also called the millage tax—and multiply it by the assessed value of the property, not the appraised value. For example, if your home is worth $300,000 and your property tax rate is 4%, you’ll need to pay $12,000 in taxes annually.
As there is no national or state-wide property tax rate, we’ll look at the U.S. states with the lowest property taxes for short-term rental investments.
List of U.S. States with the lowest property taxes
1. Alabama
The property tax rate in Alabama differs from county to county; however, in 2022, counties collected an average of 0.33% as property tax for the year. This makes Alabama one of the cheapest to invest in throughout the continental United States.
As a host, you must collect lodging taxes if you rent your property to guests for at least 179 nights. In addition, you are legally obliged to register with the Alabama Department of Revenue unless an OTA like Airbnb collects and remits all state and local lodging taxes for you.
2. Hawaii
The Aloha State has a 0.35% property rate for primary residence homes with an assessed value of less than $1 million. However, Hawaii also has the highest median home value at $1,038,544, so you can still expect to pay a healthy amount of tax.
As you convert your home into a vacation rental, hosts in Hawaii will have applied the Hotel & Resort tax rate of 1.39%, which is reserved for hotels, resorts, and transient vacation units.
3. Colorado
Colorado is a very attractive state for prospective buyers and vacation rental owners due to its average property tax rate of just 0.49%. The Centennial State is even more appealing because over 36.3 million guests stayed overnight in 2021 alone.
With its proximity to the Rocky Mountains, an abundance of outdoor pursuits, and bustling cities, it’s no wonder Colorado is popular for vacation rental businesses and visitors.
4. West Virginia
As well as John Denver, it’s likely many property investors would consider West Virginia “Almost Heaven”. Despite boasting stunning natural beauty and the renowned Appalachian Mountains, the state is also one of the cheapest in the country to live in and purchase property.
Like Colorado, in 2022, the average property tax rate is only 0.49%, making it one of the most desirable states to buy a vacation home.
5. Louisiana
At only 0.53%, you’ll find a low effective property tax rate and property values far lower than the national average. One of the main reasons for this is the homestead exemption under Louisiana state law, which allows an individual one homestead exemption up to $75,000.
When renting your Louisiana property to guests, you’ll be required to collect 4.45% in Louisiana Sales and Use Tax, among other taxes depending on your parish.
6. South Carolina
Are you dreaming of starting a vacation rental business in Myrtle Beach or Hilton Head Island? If so, you’ll be pleased to know that the average property tax rate in South Carolina is just 0.55%, with a median annual property tax payment of $980.
Owners have to pay annual property taxes based on their property’s assessed value and county tax rate, with owner-occupied residences paying less. Those leasing their properties to overnight guests are obliged to pay a 7% state sales tax to the South Carolina Department of Revenue.
7. Delaware
Delaware residents have lower tax obligations than the majority of the U.S. because the state has no VAT and no business transaction tax. What’s more, its real estate property tax stands at an average of just 0.56%, making it the ideal location to save on taxes.
When collecting short-term rental tax, 8% of the rent of each stay is due to the Delaware Division of Revenue.
8. Wyoming
Not only is Wyoming home to some of the most spectacular scenery in the U.S., but it also comes with an average property tax of just 0.58%. This is because in Wyoming the level of assessment for residential property is 9.5%, meaning you’d only be taxed on 9.5% of the property value.
From January 1, 2021, a lodging tax bill came into effect that levies a 5% tax on all short-term lodging in the state. All hosts are required to register with the Wyoming Department of Revenue for a sales tax license.
9. Utah
Utah’s vacation rental market is growing fast, making it the perfect time to invest. There were 14,782 short-term rentals listed in Utah in 2019; however, this rose sharply to 18,743 by 2021.
The good news is that Utah still claims one of the country’s lowest average property tax rates at 0.6%. The tax rate is based on the property evaluation conducted by local assessors every five years. Primary residences receive a 45% exemption, meaning only 55% of the property value is taxable.
Short-term rentals will be subject to further taxation, depending on the jurisdiction. Stays shorter than 29 consecutive nights will be subject to state Sales Tax.
10. Arkansas
Not only can Arkansas boast about its low cost of living, it can also claim to have an average real estate tax rate of 0.61%. Prospective vacation home buyers will be equally intrigued that 41 million people visited Arkansas in 2021 compared to 29.2 million in 2020, while lodging spending has grown by 5% since 2019.
Furthermore, aside from state and local sales tax, vacation rentals in Arkansas are only obliged to pay a 1% short-term rental tax to the Arkansas Department of Finance and Administration.
Investing in vacation rentals in 2023
Although property prices continue to rise throughout the country, several states have low property tax rates and attractive real estate markets. Additionally, in May this year, the Biden Administration announced the Housing Supply Action Plan, a proposal to make purchasing and renting homes more affordable.
With the vacation rental industry growing each year, by the end of 2021, the average annual revenue of short-term vacation rentals was $56,000, meaning purchasing a vacation home is still considered a smart investment by many real estate experts.
If you’re entering the market or expanding your business, why not try Lodgify’s vacation rental software with a 7-day free trial? Our bookings management solution has everything you need to increase your occupancy and income.
