The vacation rental industry is growing yearly, and annual revenue in the U.S. alone is expected to surpass $20 billion in 2025. This trend is partly thanks to online travel agencies (OTAs) such as Airbnb, Vrbo, and Booking.com, which 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!
Don’t see the form to download our vacation rental business plan template? Click here.
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 in vacation rentals, as it may significantly impact your finances.
How is property tax calculated?
Property tax is calculated based on the 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 the 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.
List of U.S. states with the lowest property taxes
As there is no nation-wide property tax rate, we’ll look at the U.S. states with the lowest property taxes for short-term rental investments.
1. Louisiana
At only 0.18%, you’ll find a low 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 of up to $75,000.
When renting your Louisiana property to guests, you’ll be required to collect 5% in Louisiana Sales and Use Tax, among other taxes, depending on your exact location.
2. Hawaii
The Aloha State has a 0.26% property rate for primary residence homes. However, Hawaii also has one of the highest median home values at $517,600, so you can still expect to pay a healthy amount of tax.
If you convert your home into a vacation rental, you’ll have to apply the Hotel & Resort tax rate of 1.39%, which is reserved for hotels, resorts, and transient vacation units. That said, Hawaii is still one of the best places to buy a beach house.
3. Alabama
The property tax rate in Alabama differs from county to county. However, in 2024, counties collected an average of 0.33% as property tax for the year. This makes Alabama one of the cheapest places 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.
4. 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 0.43%, 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.
5. West Virginia
Just like 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. In 2025, the average property tax rate is only 0.49%, making it one of the most desirable states to buy a vacation home.
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 0.50%, 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. Arkansas
Not only can Arkansas boast about its low cost of living, but it can also claim to have an average real estate tax rate of 0.52%. Prospective vacation home buyers will be equally intrigued that 50.7 million people visited Arkansas in 2023, which is a 17.1% increase from 2022.
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.
8. Mississippi
Mississippi is a very attractive state for prospective buyers and vacation rental owners due to its average property tax rate of just 0.52%. The Hospitality State is even more appealing because a record 43.7 million domestic travelers alone visited in 2023.
This increase is expected to appear in finalized 2024 numbers and well into 2025. With its proximity to the Gulf Coast and an abundance of outdoor pursuits, it’s no wonder Mississippi is popular for vacation rental businesses and visitors.
9. New Mexico
New Mexico’s vacation rental market is growing fast, making it the perfect time to invest. In 2023, short-term rentals contributed $1.01 billion to the state’s economy.
The good news is that Next Mexico claims one of the country’s lowest average property tax rates at just 0.55%. Plus, New Mexico has low state income taxes, making it a favorable location for real estate businesses
10. 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.
Investing in vacation rentals in 2025
Although property prices continue to rise throughout the country, several states have low property tax rates and attractive real estate markets. According to AirDNA, the vacation rental industry is steadily recovering from its pre-pandemic levels. This means that many real estate experts still consider purchasing a vacation home a smart investment.
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 property management software has everything you need to increase your occupancy and income.
Don’t see the form to download our vacation rental business plan template? Click here.
