Yes, in one form of fashion or another, regardless of whether it is a commercial or residential lease, renters pay property tax. The question is, do renters pay property taxes directly, or indirectly?
By directly, I mean that the tenant pays taxes directly to the government. The tenant gets the tax bill and sends in a payment directly to the government to satisfy the tax amount owed.
Whereas indirectly paying property taxes means that the tenant may not realize they're paying property taxes because the funds are not necessarily going straight to the government entity that is collecting the funds.
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What Property Tax Is
Before we dive into whether or not renters pay property tax (and if so, how?), let's quickly discuss what property tax is.
A property tax is a municipal tax levied by states, cities, counties, and other local governments on real estate. The tax is based on the value of the property, and it is usually paid by the owner of the property.
What Property Taxes Pay For
Property taxes are used to fund local government services such as schools, police and fire departments, and roads. The amount of property tax that you have to pay depends on the value of your property and the tax rate that is set by your local government.
Property tax is generally calculated as a percentage of the estimated value of the property. As the assessed value of the property increases, so do the property taxes.
In turn, that means more revenue for the city, county or state in which you pay property taxes.
Examples of Property Tax Exemptions
There are ways to get real estate property tax values reduced such as a homestead exemption, a Senior or Disability Exemption, etc.
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If it is a rental property (meaning there is either an active tenant, or the landlord is actively marketing the rental property to find a tenant), then there may be additional tax benefits available such as a rental property tax deduction which may reduce your overall taxable income as well as many other rental property tax benefits.
How Renters Pay Property Tax
As a tenant, you probably wonder if you have to pay property taxes, since you are just the renter – not the owner. As a tenant, you do not pay taxes directly to the government the way that the landowner does, but you are still paying property taxes.
What Mars and Property Taxes Have in Common
Think of it like this... When you purchase a Snickers candy bar, did you buy the actual caramel ingredient that went into making it? Did you purchase the peanuts? The sugar?
Well, not necessarily - you purchased the finished product, the candy bar.
But Mars Inc (the company that makes Snickers) made sure that all of the cost associated with creating that piece of candy was included in the price you paid for the actual Snickers bar - so you indirectly paid for all of the ingredients.
In fact, when you bought the candy bar, you even paid a very tiny portion of the cost of their equipment, factories, shipping costs, etc.
And if the government increases the cost for Mars Inc to operate their business, that cost increase also gets passed on to you - the customer.
If the cost of sugar increases, you will pay for that increase too.
In much the same way, renters pay property tax even if the property owner is the one who gets the bill and sends off the actual payment.
You won't see the bill for the sugar that they purchased to make the Snickers bar, and you won't see the bill for the property taxes. Given that example, renters pay property tax in the same way that a person buying candy pays for the materials to make the candy.
Landlord Requirements for Collecting Property Tax from Renters
When landlords collect rent, are they required to collect property tax from their renters?
No - not in the sense of what one may think in terms of collecting taxes like stores do when they collect sales tax every time you make a purchase. But landlords are required to make sure that they have the funds necessary to cover the property taxes by the due date.
That means that even though you, as a renter, are likely paying the property taxes - you probably won't see it as a line-item in your lease, or on any invoice in your rental portal.
Consequences for Failure To Pay Property Taxes
If the landlord fails to pay the property taxes, the government can place a lien on the property. This means that they will not be able to sell or refinance the property until the taxes are paid. The government can also eventually foreclose on the rental property, lock it up, and sell it to recoup its losses if the taxes remain unpaid.
Government seizure of the rental property benefits neither the property owner, nor the tenant.
Since rental properties are generally treated as a business, the monthly rental charge typically has the annual cost of property taxes built in to ensure that the rental owner does not default on their annual property tax.
So, in that sense, renters pay property tax, or at least the amount needed to cover it.
However, if there is a property tax refund of any kind, the renter will not see any of those funds even if they're the one who made the property tax payment.
How Renters Pay Property Tax in Residential Lease Agreements
Now that we've covered who is responsible for paying property taxes, the reason property taxes are charged, as well as the consequences if they go unpaid, let's discuss taxes as it relates to a residential rental property.
If you are a tenant with a residential lease agreement, then no, you are not paying taxes directly to the government. However, as a renter, you are still paying property taxes.
Let's break it down with a practical, real world rental scenario...
Let's say the property taxes are $2,000 per year... the rental owner (or property manager) will average it out over the course of a 12-month lease at $166 per month. If the base rent is $1,000, then the total rental bill will be something like $1,175 to make sure that taxes are paid for.
That may not necessarily be the exact way that the landlord determines the rental rate for their property, but the concept remains the same. The monthly rental cost will almost always include the funds needed to cover the property taxes.
Renters pay property tax even if it's not specifically outlined in the residential lease agreement that they're required to do so.
How Renters Pay Property Tax in Commercial Lease Agreements
Your next question might be, do renters pay property tax at commercial rental properties?
In general, the final responsibility to ensure that property taxes are paid, and paid on time, is the sole responsibility of the landowner.
Contractually, however, you may be required to pay it directly to the government on behalf of the owner. This is more common if you are a commercial tenant with a commercial lease. A common commercial lease where this may be the case is called a "Triple Net Lease".
In the event that you are on a long-term commercial lease - but the lease does not require that you pay the commercial property tax directly - the lease will typically have built in rental increases over the course of the term to account for any increases in the commercial property tax rate from year to year.
No matter which way you look at it, the renter pays the property tax.
How rent is calculated to include property tax
There are multiple methods used by investors and rental property owners to determine the monthly rental cost for any given investment property, but the general idea remains the same; do not lose money.
The vast majority of rental property owners in the US are small, locally owned businesses, and losing money can be devastating.
One of the ways that rental property owners avoid losing money is to make sure that their renters pay property tax.
To that end, a rental property owner has to understand what the overall rental income will need to be for the property. That means taking a look at all of the property related expenses each year - including the property tax - which is determined by the property value.
A lot of property management software (e.g. TenantCloud) offer tools that help property managers do this more efficiently with things like year-end tax preparation reports, property income and expense reports, etc.
Once the property manager has a better understanding of all the property expenses - including property tax - then they have a baseline for what the rental income needs to look like for that specific property.
When it's all said and done, the property taxes are almost certainly included in the monthly rental charge.
And when property expenses increase year over year, so does rent. Which can be helpful to remember the next time your state, county or city proposes real estate tax increases to cover their next project.
The rental property owner may receive the actual tax bill, but ultimately, the renters pay property tax.