The Best U.S. States for Short-Term Rental Investments with Low Property Taxes

The vacation rental scene is getting bigger and more exciting every year. In fact, it's projected that the U.S. alone could be generating a whopping $20 billion a year by 2025! Companies like Airbnb, Vrbo, and Booking.com are helping pave the way by marketing thousands of fabulous vacation rentals to folks all around the world.

Are you thinking about snagging a new property to kickstart or expand your own short-term rental business? Just remember that, depending on where it's located and what type it is, your vacation rental could be subject to a variety of taxes.

How is property tax calculated?

Property tax is determined based on which state your property is located in and the overall value of your property. Local governments also consider several other factors, like how close you are to local services, the potential for land development, and the average length of your rental terms.

To get a clearer picture of your tax rate, find out your county's mill levy (another name for millage tax) and multiply it by the assessed value of your property.

For example, if you've got a $400,000 house and a property tax rate of 4%, you're looking at an annual tax bill of $16,000. Since there isn't a national or state-wide property tax rate, let's explore some U.S. states with the lowest property taxes for short-term rental investments.

U.S. States with lower property taxes

1. Alabama

In Alabama, property tax rates can vary from county to county. However, in 2022, counties collected an average property tax of 0.33%, making Alabama one of the most budget-friendly places to invest in the U.S. If you rent your property to guests for 179 nights or more, you'll need to collect lodging taxes unless a company like Airbnb is already doing it for you.

2. Hawaii

In the beautiful Aloha State, the property tax rate for primary residences valued under $1 million is 0.35%. But keep in mind, Hawaii also has the highest median home value in the U.S., so you might still end up paying a pretty penny in taxes.

As you transform your Hawaiian home into a welcoming vacation rental, don't forget you'll be joining the ranks of hotels and resorts by applying a Hotel & Resort tax rate of 1.39%. This goes for all transient vacation units, too. It's just part of the process, making your Hawaiian oasis an official slice of paradise for visitors!

3. Colorado

The Centennial State is a hotspot for vacation rental owners and prospective buyers alike, thanks to its average property tax rate of just 0.49%. With its stunning landscapes, a wealth of outdoor activities, and vibrant cities, it's no wonder Colorado is so popular!

4. West Virginia

West Virginia, known for its breathtaking beauty and the iconic Appalachian Mountains, also has an attractive average property tax rate of 0.49%, making it a great place to consider buying a vacation home.

5. Louisiana

In Louisiana, the effective property tax rate is a mere 0.53%. One of the reasons for this is the homestead exemption under Louisiana state law, which provides an exemption of up to $75,000.

6. South Carolina

Dreaming of starting a vacation rental business in Myrtle Beach or Hilton Head Island? You'll be thrilled to know that the average property tax rate in South Carolina is just 0.55%. If you lease your property to overnight guests, you'll need to pay a 7% state sales tax to the South Carolina Department of Revenue.

7. Delaware

Delaware residents enjoy lower tax obligations than most of the U.S., as the state has no VAT and no business transaction tax. Plus, its real estate property tax averages a mere 0.56%. When it comes to short-term rental tax, 8% of each stay's rent goes to the Delaware Division of Revenue.

8. Wyoming

Wyoming, with its awe-inspiring landscapes, boasts an average property tax of just 0.58%. From 2021, a lodging tax bill has been in effect that applies a 5% tax on all short-term lodging. All hosts need to register with the Wyoming Department of Revenue for a sales tax license.

9. Utah

Utah's vacation rental market is booming, making it a great time to invest. The state's average property tax rate stands at a low of 0.6%. Short-term rentals will be subject to further taxation depending on the jurisdiction, with stays shorter than 29 consecutive nights subject to State Sales Tax.

10. Arkansas

Arkansas isn't just known for its low cost of living, it also boasts an average real estate tax rate of 0.61%. With a significant increase in visitors and lodging spending since 2019, it's an enticing option for prospective vacation home buyers.

Getting into vacation rentals in 2023

Even though property prices are on the rise nationwide, there are several states with low property tax rates and appealing real estate markets. Plus, in May 2023, the Biden Administration announced the Housing Supply Action Plan, aimed at making buying and renting homes more affordable.

With the vacation rental industry expanding each year (by the end of 2021, the average annual revenue of short-term vacation rentals was $56,000), investing in a vacation home is still seen as a savvy move by many real estate experts.

So if you're considering jumping into the market or growing your existing business, why not check out Hostaway's vacation rental software? It's a short-term property management solution that has everything you need to boost your occupancy and income.