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Property taxes are a topic that the average Indianapolis Landlord won’t find overly exciting and I totally get that.
But property taxes are an important piece of the investing puzzle. If you’re investing in Indianapolis or you plan to invest here, you need to understand how property taxes in Indiana work.
I can’t tell you the number of phone calls we’ve received from our Clients regarding property taxes over the past several years.
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 read through this comprehensive guide 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.
Property taxes in Indiana are based on the assessed value of real property, including land, buildings, and certain improvements. The assessment process is governed by state laws and administered at the county level by individual County Assessor’s Offices.
Here’s how the process generally works:
1. Assessment: County Assessors determine the assessed value of each property within their jurisdiction. Assessments are typically conducted periodically, often every year or every few years, to reflect changes in property values.
2. Calculation of Property Tax: Once the assessed value is determined, property taxes are calculated based on the property’s assessed value and the applicable tax rates, which are set by various taxing authorities such as school districts, cities/towns, counties, and special taxing districts.
3. Tax Rates: Tax rates are expressed as “tax rates per $100 of assessed value.” Each taxing authority sets its own tax rate, which is applied to the assessed value of the property to calculate the property tax bill.
4. Exemptions and Deductions: Indiana offers various exemptions and deductions that can reduce a property owner’s tax liability. These may include homestead exemptions, deductions for veterans, seniors, disabled individuals, and other qualifying criteria.
5. Billing and Collection: The County Treasurer’s office typically issues property tax bills annually. Depending on the county, they may be payable in one or two installments. Note: In Indianapolis, you will receive one bill in the Spring, payable in two installments.
Failure to pay property taxes can result in penalties, interest, and even the possibility of a tax lien or foreclosure.
1. Assessment Methodology: Indiana employs a market value-in-use assessment system, which aims to assess properties at their current market value, considering their actual use rather than their highest and best potential use.
2. Property Tax Caps: In 2008, Indiana implemented property tax caps as part of property tax reform measures. These caps limit the amount of property taxes that can be assessed on residential, rental, and agricultural properties to a percentage of their assessed value.
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%.
3. Property Tax Relief Programs: Indiana offers several property tax relief programs to eligible homeowners, including the Homestead Standard Deduction, Mortgage Deduction, Circuit Breaker Tax Credit, and more. These programs help reduce the overall property tax burden for qualifying individuals.
4. Assessment Appeals Process: Property owners have the right to appeal their property assessments if they believe they are incorrect or unfair. The appeals process typically involves presenting evidence to support a different valuation to the local county property tax assessment board of appeals.
5. Tax Sale Process: In cases of delinquent property taxes, Indiana allows for the sale of tax liens on properties through tax sales. These sales enable the county to collect overdue property taxes by selling tax certificates to investors, who then have the opportunity to collect the debt or foreclose on the property.
1. Understand Your Assessment: Review your property assessment carefully to ensure its accuracy. If you believe your assessment is incorrect, you have the right to appeal.
2. Explore Exemptions and Deductions: Take advantage of any available exemptions and deductions for which you qualify to lower your property tax bill.
3. Budget for Property Taxes: Property taxes can be a significant expense, so it’s essential to budget for them accordingly. Set aside funds each year to cover your property tax obligations. Also, keep in mind that as the value of your property increases, your tax bill will increase as well.
4. Stay Informed: Keep abreast of any changes to property tax laws, rates, or relief programs that may affect your tax liability.
5. Consider Consulting a Professional: If you’re unsure about any aspect of property taxation or need assistance with assessment appeals or tax planning, consider seeking advice from a qualified real estate attorney, tax advisor, or property tax consultant.
It’s important to understand the impact the Homestead Exemption has on your tax liability.
Often, investors will purchase a rental home with an existing homestead exemption on file. For example, most foreclosures that occur in our city are owner-occupied properties. If you buy that foreclosure or buy it within a year of 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.
Ughhhh….
So, again, while taxes aren’t interesting, you need to understand them, plan for them and avoid being Joe.
It’s important to understand the impact the Homestead Exemption has on your tax liability.
Often, investors will purchase a rental home with an existing homestead exemption on file. For example, most foreclosures that occur in our city are owner-occupied properties. If you buy that foreclosure or buy it within a year of 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.
Ughhhh….
So, again, while taxes aren’t interesting, you need to understand them, plan for them and avoid being Joe.
T&H Realty Services is a full-service, residential Property Management company located in Indianapolis, IN.
