My property taxes went up this year. Last year they were $310 for the year; this year they are $315.23. Ugh, stupid taxes!
I live in a state with no income tax: Texas. We do have an 8.25% sales tax, but that tax doesn’t apply to groceries or livestock feed. Plus I have an agricultural exemption, so I don’t pay sales tax on much of what I buy. That only leaves property taxes.
In 2011, when we purchased our homestead, I knew there would be THREE expenses that would continue to go up, and that I could not avoid.
That doesn’t mean other things don’t go up as well. But, while homesteading, there is some opportunity to grow your own food, provide your own entertainment, and take care of yourself… particularly if you have no mortgage.
Regarding energy, I installed solar. This isn’t a panacea, but the process lowered both my energy use and energy costs substantially. Turns out the answer to the question, “Is solar worth it?”, is a positive one.
When it comes to healthcare, I used Obamacare at first. $15 per month with a $500 deductible. How could I get it so cheap? Because I’m “poor on purpose” which qualifies me for such things. Because I’m a veteran, eventually, I switched over to VA healthcare. So now I get free healthcare for life.
That just leaves taxes. I don’t make enough taxable income in my 4-Hour Homestead Workweek to exceed the federal standard deduction, so I pay no federal income taxes. When it comes to property taxes, the tax rate in Texas is pretty consistent statewide. What is it? It’s AS MUCH AS THE LAW ALLOWS. Literally, that’s true. Just about every tax authority is charging the highest rate allowed by law. If you live in a city, then it runs to about 2.3% of taxable property value.
The picture to the right is a “standard” older house in Austin Texas. I was just there this weekend to train a dog. The house is 1,600 square feet and was built in 1972. It’s not a great house, needs some maintenance, but it’s in a decent neighborhood near downtown.
The taxable value of this house is $450,000. The property tax is $10,413 per year. That means the owners of this house have to pay $813 per month in taxes for this house. If they don’t set aside $813 per month and pay their taxes every year then their house will be seized by the city.
10 years ago the same house had a taxable value of $180,000. 5 years before that it was $120,000. So the taxes went from $2,700 to $4,100 to $10,000 over 15 years. The house didn’t change. The tax rate didn’t change. The VALUE of the house changed.
Why does this matter? Remember the basic idea of both homesteading and retirement, “I will pay off my house and live in it mortgage free on my nest egg.” Due to taxes, there goes $10,000 per year… in 5 years will it be $15,000? In 10 years will it be $20,000? If the property taxes require lots of cash, then I have to MAKE or save lots of cash. Having expenses continue to go up as I get older is not good. What good is a homestead if I can’t pay the taxes on it 20 or 30 years from now?
My real estate taxes are only about $310 per year for 10 acres of land with lots of buildings on it. How do I do it?
How to Save Money on Taxes by Homesteading Step #1: MOVE!
I moved to where property values are as low as I could get them. It’s 2 hours from Dallas, 3 hours from Austin, and 2 1/2 hours from Houston. There is nothing of “value” here. The average income here is among the lowest in the state. The biggest employer: Walmart. The 2nd biggest: a local private prison.
Land is cheap, houses are cheap, there is no population growth. There is no land-value growth.
If I lived in an expensive area, then my property would be worth a lot of money. Property that is worth a lot of money is a burden, not a boon—at least for me because I never plan on selling. If you aren’t going to sell, then the land is just a tax expense, not an appreciating asset. So I moved to where land is cheap. I didn’t have to move that far. My old (expensive) city house was still an hour’s commute (in traffic) from Dallas. Now I’m 2 hours from Dallas. I don’t commute anymore. I don’t have to, because I don’t need a big income.
I actually live in one of the highest property tax states, but I negated it by moving out of the lowest property VALUE areas in the state. This helped me both afford my homestead and avoid property taxes. Other states have much lower property taxes, but they have other taxes that might be harder to avoid, such as income taxes and vehicle property taxes.
How to Save Money on Taxes by Homesteading Step #2 – LIVE IN A BARN! (Or some other non-traditional building.)
What’s a barn worth? $1,000 – $3,000? Seriously. Think of an old big red barn. It’s not worth much. Now think of a new brick home with shiny asphalt roof the same size (with hedges). How much is the house worth? $100,000? $150,000? Let’s say $100,000.
Now fly an airplane over the property in order to assess the property value. “Asphalt roof, brick home… $100,000” or “Old barn… $3,000.” What’s the tax liability difference? $2,300 in taxes or $69 in taxes. If you live in a barn, you can pay the property taxes from change you find in your dryer over the course of a year.
How do you live in a barn? The airplane can’t see the INSIDE of the barn. It could have central AC, granite counter tops, and a marble walk-in shower.
I built an apartment out of an old rabbit shed. Tile floors, drywall, cedar-wood trim. Comfy, cozy. Taxable value $650, so it costs $14.95 per year in taxes. I make sure to put a tin roof on any building I build and paint it like an outbuilding. My taxes don’t change that way.
My 10 acres has a value of $29,900. My buildings (a mobile home, an apartment, an art studio, and dog training buildings) have a taxable value of $5,900. THAT’S ALL!
How to Save Money on Taxes by Homesteading Step #3 – DON’T LIVE IN A CITY!
20% of property taxes in Texas are for the city. By simply living outside the city limits, I avoid 20% of property taxes. What do you get for paying that 20%? Not much. You don’t get free water or free garbage pickup. You have lots of cops to give you tickets, lots of traffic, and a city library only people with no internet service at home use anymore.
How to Save Money on Taxes by Homesteading Step #4 – USE HOMESTEAD EXEMPTIONS!
I don’t know about other states, but in Texas, you can file for “homestead” exemptions. It doesn’t have to be a literal homestead. The $450,000 house in Austin can have homestead exemptions. The exemptions only take about $25,000 in taxable value off the property.
The value of my land and buildings is $35,800. Exemptions apply differently to different types of tax.
For the county, I only get $7,100 in exemptions. Making the taxable value $28,509. But the county tax rate is very low. 0.58%. The tax is $165.
The school district tax rate is high. The rate is 1.36%. But I also get the highest homestead exemption of $25,000. So I’m only taxed on $10,600 of property value. The tax is $145.
Then there’s another tax that’s really low with a $10,000 exemption. That tax is only $6.
Take advantage of every tax break you can get. I use both homestead exemptions and agricultural exemptions. Generally, these tax breaks only require filling out some paperwork. It is well worth the effort.
Taxes Are Continuing to Rise
Even out here, the actual tax rate went up 15% in the last 5 years. That’s not the value of the land. That’s the basic tax rate. Tax rates are going up everywhere and new taxes are being applied to properties. Would I rather pay 15% more on $310 in 5 more years or 15% more on $450,000? That doesn’t count having to actually PAY FOR THE HOUSE. My farm cost $50,000. That’s it! I paid it off in 5 years for the same price as the taxes on that house in Austin. This is the difference between living where land is cheap and living where land isn’t.
My Effective Tax Rate?
The state average is 2.3%. My effective rate is 0.875%.
The average property value in Texas is $190,000. My property value is $36,000.
So the average property tax in Texas is $4,370. My property tax is $315. A savings of 93%.
Every dollar that I don’t have to pay in taxes, year after year after year in retirement, is money that I don’t have to save now. Every dollar I don’t have to pay now in taxes is another dollar that I can save for retirement. Taxes never go away and property taxes always go up, but there are ways to keep property taxes as low as possible for the rest of your life… Run away and create a homestead instead!
Thanks for posting this, and I understand your desire to live a sustainable lifestyle. How does this not constitute tax fraud if you are misrepresenting the value of your property?
Thanks for reading the article, Josh. That’s a good question and completely appropriate to the article. I certainly can’t answer the question legally, since I’m not a lawyer and tax rules wildly vary depending your tax authority. But I can share my opinion and offer some examples.
Different tax authorities estimate property taxes using different methods. First, big city and highly regulated states have very specific building codes for buildings used for “housing.” I train dogs in Austin where it would possibly be illegal to consider what I live in to be a permanent residence at all. It certainly wouldn’t pass any building code inspections. However, in the unincorporated area of the county in which I live you could live in a refrigerator box pretty much. Along the same lines if you want to do home improvements in many places they require permits and inspections. Those processes could (and in some areas might) be used to adjust the home’s taxable value.. There are even urban myths of cities doing in-home inspections to adjust taxable values (but I can find no evidence of it with a simple google search.)
The use of portable building shells being finished out and used as permanent homes is rapidly growing. How tax authorities handle that is up to them. One of the appeals of homesteading is to get out from under the thumb of many of these issues. I moved to one of the least regulated and taxed places in the U.S. – East Texas outside of the city limits. That was point #1 in the article. California is one of the most regulated, taxed and expensive states in the U.S. Last night as I was researching the wildfires I realized that their electricity costs TWICE what mine costs and their electric company does not keep their high tension wire easements clear of trees and brush. In Texas the electricity costs half as much as every electrical line in the state is trimmed to keep it clear of trees constantly. There is no income tax in Texas and minimal regulation. So moving to Texas or someplace similar would create a big difference. On the other hand Texas has very low Medicaid coverage and the welfare system is weaker than CA. So there are trade-offs.
In my jurisdiction I don’t think it’s tax fraud because I have complied with all the regulations regarding property (there are none). I have a deed. The county appraises my land based on their criteria every year, and I pay my $310. There is no FORM I can fill out at the country that says “I added a granite floor to my bathroom, please change my property value.”
There’s also the aspect of what I might call “commonly observed law” that often differs from strict observance. For instance, Texas has a sales tax. When someone in Texas buys anything online or from a catalog they are required to pay the sales tax. If the company you bought it from doesn’t charge you the sales tax they you are required by law to fill out a form and pay the tax yourself… to “self-report.’ Along the same lines Texas law states that you might need a tax permit for your sale of personal items (based on the situation), even such things as garage sales. Of course, nobody does that. It’s stupid. If that law was actually enforced it would create a state-wide uproar.
I know this is a long answer, but I like writing. The sort of thing you are asking about is sometimes exactly what makes people want to homestead in the first place. So, don’t commit tax fraud… Move someplace where they let people live in peace instead. Good question.