Housing & Mortgage
High Property-Tax Locales Exact a Huge Penalty Over Time
Would you move to another city to save $500,000? $1 million?
Buying a $500,000 house in a low property-tax locale, such as Denver, can save you, over 30 years, $500,000 when compared to a high property-tax city like Chicago.
Looking at houses closer to $1 million? You could realize savings of more than $1 million over time.
Homebuyers rightly focus on overall price and their all-in monthly expense (mortgage payment + property taxes + insurance), each number prominently displayed on home-search websites. But they’d profit, too, from some careful study of the property taxes paid on an individual home, of the rates overall in that market, and of the trend — up or sideways, almost never down — in the tax.
Lowest and highest property tax
The five states with the lowest property tax rates, as a percentage of home value, according to a recent compilation by WalletHub, are:
- Hawaii 0.28%
- Alabama: 0.41%
- Colorado: 0.51%
- Louisiana: 0.55%
- District of Columbia: 0.56%
The five highest states are:
- New Jersey: 2.49%
- Illinois: 2.27%
- New Hampshire: 2.18%
- Connecticut: 2.14%
- Vermont: 1.90%
A tale of two cities
Let’s focus on two cities — low-tax Denver and high-tax Chicago. Each has a thriving business and cultural center, essentially the capital of its region. Chicago is nearly four times larger, population-wise, than Denver and has more impressive cultural and educational institutions. Denver, on the front range of the Rockies, offers great lifestyle, abundant sunshine and recreation choices. Sales and income tax are slightly higher in Chicago than in Denver.
In Chicago, let’s say you’ve got your eye on a Jefferson Park four-bedroom, three-bath, 1,800-square feet English Tudor built in 1940. It has some nice updates, is well kept and has a lovely back deck. It lists as of this writing for $496,000.
The 2018 property taxes were $6,963, Zillow tells us, a 22% jump from the prior year and would likely rise after a sale to $885 a month, Zillow’s calculator assumes, using a 2.14% rate after the purchase.
Denver houses at that price are somewhat smaller. A four-bedroom, three-bath, 1,374-square-foot brick home on a 7,000-square-foot lot, 15 minutes southeast of downtown, is listed at $495,000 as of this writing. It’s not as tidy or updated as the Chicago house. Its 2020 taxes were $1,374 (yes, that’s for a year), Zillow tells us, and would likely rise to $219 a month after a sale.
Insurance is roughly the same on the two houses, and your mortgage rate would depend on the local market and your finances. But the difference in property taxes alone is $666 a month.
Putting money to better use
If you choose Denver and invest those monthly savings over the course of a 30-year loan, assuming a conservative 5% return, you’d get more than $500,000 in savings. Or, indulge your travel bug with a grandiose $8,000 vacation every year.
In both cities, $1 million will get you a fabulous house in an enviable location. A Lakeview neighborhood custom home, built in 2000, with four bedrooms and four baths, is listed at $1 million, as of this writing.
I won’t repeat all the details, but the 2020 taxes were $20,217 and Zillow estimates a buyer’s monthly tax bill at $1,783.
In Denver, a 1907 brick four-bedroom, four-bath home a block from City Park and an eight-minute drive from downtown is also listed at $1 million. Its 2020 taxes were $3,820 — yep, they’re going up — and Zillow estimates a buyer would pay $439 a month in taxes.
That $1,344 monthly tax difference, once again, invested over 30 years at a 5% return, would put you more than $1 million ahead.
Looked at another way, suppose your budget is $4,000 a month. This suggests your price range in Chicago is closer to $675,000, while in Denver it’s $875,000.
Guesstimating future taxes
So, your question is: Will the gap in property taxes — the Chicago penalty — widen or narrow over time? Denver’s rapid population growth and a housing shortage there suggest more rapid price appreciation in coming years than in Chicago, where after falling by nearly 1 million last century, the population is stable but not rising much.
Something could disrupt those trends, severe drought in Denver due to global warming, say, while Chicagoans freely guzzle the cool waters of Lake Michigan. But forces in play would suggest Denver homes appreciating faster than Chicago homes.
Higher prices mean higher taxes, of course, but cities set their tax rates to cover their expenses, not in any rational measure of market worth. And it is Chicago that is going to clearly need a lot more money from its homeowners. Cook County, which includes Chicago, now helpfully includes on property tax statements the $67 billion in debt and $65 billion (and counting) uncovered pension and healthcare obligations of the various taxing districts, led by the city of Chicago. The state of Illinois is similarly beset with unfunded obligations.
It would seem a miracle if Chicago could limit property tax increases going forward to 2%. Let’s assume Denver, which has its own, although far smaller, financial problems, also raises property levies by that much each year.
What’s your future as a homeowner look like?
A Chicago $500,000 house of today, paying 2.1% property tax, or $10,500, would see its taxes escalate to $18,646 by the 30th year, and that homeowner would have paid about $426,000 in property taxes during that time.
In Denver, a $500,000 house paying the 0.57% rate, or $2,850, would see its annual tax bill hit $5,061 30 years later. And the homeowner would have paid a total of about $116,000.
Put another way, that’s $310,000 more out of pocket.
Planning to retire? House paid off? Remember to plug the other housing costs — insurance, upkeep and, yes, property taxes — into your cost calculator.