Understanding Property Taxes for Your Indianapolis Rental Property
Property taxes are a topic that the average Indianapolis Landlord won’t find overly interesting and I totally get that.
But property taxes are important, and if you’re investing in Indianapolis or you plan to invest here, you need to understand our property tax rules.
I can’t tell you the number of phone calls we’ve taken over the past several years from our customers regarding property taxes. And, trust me, they are not fun phone calls.
Me: “Hi Joe Investor. Good to hear from you. How can I help?”
Joe Investor: (very panicked voice) “Jeremy, I just received my tax bill and my property taxes doubled!! What’s going on??”
That’s followed by a few minutes of Joe discussing how his cash flow is killed, we have to raise rents immediately, being a Landlord is the worst idea ever, etc.
The bottom line is that Joe didn’t understand how property taxes work BEFORE buying his investment property. And Joe clearly didn’t use us to help buy his home, or Joe would have known exactly what to expect.
So, don’t be Joe.
Take a few minutes to understand how our taxes work here in Indiana. They are a little different, and depending on how and what you buy, you may have to adjust your budget and your cash flow expectations to account for taxes.
One-Two-Three Tax Cap Rule
Simply put, we operate under a one-two-three tax cap rule. This means if the property is owner-occupied and there’s a coveted homestead exemption on file, you should pay no more than 1% of the assessed value in property taxes annually.
Meaning, if that property is assessed at $200,000, the owner would pay a maximum of $2,000 under that tax cap rule (assuming no other special assessments).
Non-owner-occupied homes, or those that are occupied by Tenants (i.e. the homes that, if you are reading this blog, directly apply to you), are subject to a 2% tax cap.
So, that $200,000 Indianapolis rental property with no homestead exemption would be subject to a $4,000 annual tax bill.
The third category is for commercial buildings like an office structure. That tax cap is at 3%.
Property Management Indianapolis: What this Means
It’s important to understand the impact this has on your tax liability.
Most of the time, investors will buy a rental home with an existing homestead exemption on file. For example, most foreclosures that occur in our city are owner-occupied properties. So, if you buy that foreclosure, or buy it within a year the foreclosure, the homestead exemption will likely still be in place, and your estimated taxes will be around 1% of the assessed value.
Sounds great, right?
What happens, however, is when you buy the home, you are required to fill out the Indiana Sales Disclosure Form (Form 46021). This form specifically asks if the property you are buying will be your primary residence. When you choose “No” this will start the process of removing the homestead exemption and, yes, you’ll now begin paying 2% of the assessed value in property taxes.
If you have a mortgage in place that escrows your tax payments, this will be even more painful, since the mortgage company will not only start accruing twice the tax amount, but will also likely start charging you an additional amount to make up for the shortage in your escrow account the new tax bill created.
So, again, while taxes aren’t interesting, you need to understand them, plan for them and avoid being Joe.