Tiny Houses and Taxes: Everything You Need to Know

Tiny Houses and Taxes: Everything You Need to Know

Tiny houses and taxes: do these two words even belong in the same sentence?

The essence of the Tiny House Movement is downsizing. The primary aim of people moving into tinier homes is financial freedom. But does that really happen?

Sure, compared to regular (in this case, larger) houses, tiny houses generate cheaper utility bills. Still, you have to deal with the possible hidden costs of this movement, one of them being taxes. 

Are you planning to move into a tiny house soon? You might want to read up before you buy that prefab kit

In this post, we discussed everything you need to know about tiny houses and taxes.

About property taxes

tiny houses and taxes - property tax word on magazine
North American homeowners pay property taxes every year.

First, let’s have a recap about property taxes in the United States. 

What are property taxes?

American homeowners pay an annual property tax, based on the value of their purchased houses.  You can also say it’s how the local government makes money or revenue.

If you own land and built a house on it, you will pay for an annual property tax. If you fail to pay it, the government will seize your property. At the beginning of this tax collection, a tax authority will conduct a property tax assessment

Why are property taxes important?

If you don’t pay your home taxes, you could lose your house. Besides that, property taxes are important because they sustain public infrastructure—public schools, libraries, community centers, parks and recreation, etc. Without these funds, those facilities would not survive on their own. 

How are property taxes in the U.S. calculated?

The tax authority will conduct a property tax assessment on a scheduled date. Through this, they can calculate your home’s assessed value. As for the amount of your property tax, you can multiply your home’s assessed value by your local government’s imposed tax rate. The result is your property tax. 

How are property taxes collected? 

The local government annually collects property taxes. If you buy a house, you also have to pay a property tax during the transferring of the house. This is also called the Real Estate Transfer Tax or simply Transfer tax. 

What is the average property tax rate in the U.S.?

Homeowners typically pay 1.2% tax rates, but it can range from 0.4% to 2.44%. The main factor in the property tax rate in a state is the cost of living. A homeowner can annually pay a property tax as low as $560, but it can balloon into $7,800, depending on where he or she lives. 

States with property taxes: Lowest Vs. highest 

If you want to pay the lowest property taxes, you can live in the following states: Alabama, West Virginia, South Carolina, Arkansas, Louisiana, Hawaii, or Delaware. Don’t want to pay a giant property tax? Avoid these states at all costs: New Jersey, New York, Wisconsin, Connecticut, New Hampshire, Illinois, Massachusetts. 

Tiny houses and taxes

tiny houses and taxes - a row of colorful tiny houses in a grassy land
A row of colorful tiny houses in a grassy land

Will owning or buying a tiny house on wheels still involve taxation? We answered your questions below. 

Does a property tax apply to tiny houses? 

The property tax for regular houses does not apply to tiny houses. However, if you will live in a state that collects personal property taxes for motor vehicles, then you still might have to pay it. Tiny houses towed by a car is considered a recreational vehicle (RV) in many states, so the same taxation rules might apply to them as well. 

What is a personal property tax? 

Tangible Personal Property (TPP) or Personal Property taxes are levied on mobile properties—boats, RVs, campers, etc. In some states, TPP taxes are also imposed on anything that generates incomes. For instance, if you own a mechanic shop or an apartment rental, the state will still levy TPP taxes on the equipment and furniture. 

What are the states that don’t levy TPP taxes?

A report by Tax Foundation in 2012 stated that ten states in the U.S. have stopped imposing TPP taxes. Still, most states still levy TPP taxes, especially on businesses. 

What are the taxes I might pay for my tiny house on wheels? 

Tiny houses on wheels are RVs, hence you will be levied for the same taxes. If your state imposes the following, then you have to pay for them: sales tax, Tangible Personal Property (TPP) tax, Mortgage Interest Deduction, real estate tax, and a home office, if you have one. 

How to avoid paying for a sales tax on an RV?

The tricky solution is buying an RV and then registering it in a state that doesn’t levy sales taxes. However, you can’t easily do this because some states require minimum years of residence from a person before they register your RV.

More about tiny houses and taxes

tiny houses and taxes - tiny house at night
Property taxes don’t apply to a mobile tiny house, but you still have to watch out for other types of taxes.

Whether you’re building or buying a tiny house in the US, you must know the different taxes or the tax breaks that you might possibly encounter. After all, the laws about tiny houses and taxes vary in every state, so knowing these will prepare you for that possibility. 

Taxes

Sales tax

When you buy a tiny house on wheels, you might also pay for a sales tax if your state levies it. Alaska, Oregon, Montana, New Hampshire, and Delaware don’t have a sales tax. According to Avalara, it’s easier to register an RV in Montana because of a registration rule loophole. 

Real estate transfer tax 

In a real estate transaction or the transferring of the property’s title, the buyer and the seller must pay a transfer tax. They can split it halfway; it depends on their agreement. The seller can also pay it on their own. The state will also determine the transfer tax based on the property’s market value and classification. 

Death taxes 

1. Gift tax. 

Donator’s tax or gift tax is imposed on the transfer of property, whether the giver is living or already dead. When you give a property that costs more than $15,000, the government will levy you a transfer tax starting at 18%. There are many exemptions to this tax.

2. Estate tax. 

When a person suddenly dies, the government will levy an indirect tax on the transfer of the property. An indirect tax is what sellers add to the original price or a product, so the buyer indirectly pays their tax through buying the product, in lieu of the seller. 

3. Generation-skipping tax (GST). 

This tax is imposed on the transfer of a property or a gift to a younger relative or unrelated person (at least 37 ½ younger). For example, when a grandmother transfers the ownership of a house to her grandson, the GST will also take effect on the latter, even after the death of her grandmother. This also ensures that he will pay the 40% flat rate.

Tax breaks

Mortgage Interest Tax Deduction

This tax break gives homeowners a chance to minimize their taxable income. Since a tiny house on wheels is still a house, you can also claim your mortgage interest tax deduction on it. If you bought a tiny house after December 15, 2017, you could reduce the first $750,000 in your mortgage. 

Home office tax deduction 

Do you plan to work in your tiny house? The home office tax says hello. It’s a tax break for any functioning office in a dwelling that measures less than 300 square feet. If you have this at your tiny house, you can use this for a deduction.

Tiny house resale values

tiny house on wheels with black car in grassy area
The tiny house lifestyle is indeed cheap, but their market value depletes easily too.

Just because you’re about to make your nomad dream come true doesn’t mean you shouldn’t think about the future anymore. Besides the taxes, you also have to think about a tiny house’s depreciation. Here are the facts about tiny houses’ resale values.

Do tiny homes retain their value?

Things that get easily damaged also lose their value faster. That is why over time, tiny houses depreciate because they are more prone to wear and tear. 

Since the space is limited, the easier it is to mess a tiny house. Over time, these scratches and dents become more obvious. As a result, their market value quickly depletes. 

There’s also the likelihood of dust gathering. If the occupants aren’t savvy in choosing their appliances, causing them to buy more things. As a result, you have to be extremely meticulous about your equipment because tiny home appliances are more expensive. 

Because tiny house appliances don’t have standard measurements, like those sold in malls or appliance centers, people have them customized if they can’t find a furnished prefab house package. 

Are tiny homes relatively cheap to own? 

Sure, tiny houses are mobile and light. They are in demand. They are also relatively more inexpensive than regular houses to maintain. Despite those qualities, they are not always cheap to own. 

Owning a tiny house involves many hidden costs, which may be surprising to many people. If you’re not careful or savvy enough, you might spend on external storage and unnecessary upgrades.

How to retain my tiny house’s value?

Planning to resell your tiny house in a few years? Well, get ready to spend on some improvements. If you’re serious about reselling this tiny property, just follow these golden, foolproof tips. 

Spend on smart improvements.

Not all upgrades are necessary. Think about the tiny house on wheels (THOW) enthusiasts. What kind of people are they and what are their needs? Think about investing in improvements that cater to their needs. It can range from a dehumidifier and solar panels to an HVAC system. 

Care for your SUV or pickup truck. 

Just because the vehicle that tows your car is for heavy-duty use doesn’t mean you have to skimp on maintaining them. Don’t be complacent in your car. You want a THOW with fully-functioning wheels, right? Therefore, follow your vehicle’s manufacturer-required service schedule.

Connect with other people with nomad lifestyles.

People who have been on the road for a long time know the crucial tricks in maintaining their lifestyle. If this is your first time pursuing this lifestyle, you could use a tip or two from them—or even more!

They know how to navigate this kind of living more than anyone, especially the safety and maintenance tricks, without slashing a hole in your pocket. 

Take heed of your local government’s regulations. 

Rules are not here to ruin your life; they exist to put it in order. It will not hurt for you to read your local government’s laws about tiny houses. Give your state’s ol’ dusty building code book a skim.

If you live on your own, you will DIY most of the time, right? So, you should keep a stack of your town’s construction and zoning codes when the going gets tough. 

Renting out tiny houses: Does it work? 

two tiny houses on wheels in grassy land
It’s possible to profit from renting out tiny houses, but make sure there’s a market for it, first.

Think of renting out a tiny house under 400 square feet? Here’s a short overview about it. 

Is it possible to profit from a tiny house?

You can start renting it out as a vacation house. You can lease it as a writing cabin. Nomad people or backpackers need someplace to stay from time to time—and they’re looking for cheaper places than hostels and AirBnBs. 

The overheads might be lesser than if you live in it. 

This is provided that you have a red hot market. If you do, and if you’re into short-term rentals, you can expect lower maintenance costs. If you live in it permanently in a tiny house, you have to 

What are the possible businesses you can do with tiny houses?

You have several ideal choices—a Bed and Breakfast business, an apartment, and a food truck business. There are other brighter ideas if you’re creative. Of course, you have to watch out for the sales tax and rental tax. 

In a nutshell

The bottom line is every state imposes different, localized tax rules and breaks for every homeowner. 

As a tiny house owner or to-be-owner, you might deal with either more complicated tax rules or none at all. That’s why you should take the time to talk to a tax authority or study local resources about your town’s tax legalities. 

If you fail to pay—or even fail to be aware of such a regulation exists for tiny houses—you might face dire consequences. 

We’re not scaring you, but you might lose your house, your dream lifestyle. So, do your best to investigate!  

Related questions

What are the tiny house laws in Texas? 

Texas is very accommodating to the Tiny House Movement. In fact, Spur, the first town that opened its arms to tiny houses, is in Texas. So, if you’re planning to build a tiny house in Texas, you’re free to do as you wish. Other Texan towns like Austin, Fortworth, and Breckenridge are also welcoming to tiny house builders. 

What are Wisconsin’s tiny house laws?

While Texas is friendly to tiny houses, Wisconsin is the opposite. Besides having a few tiny house builders and many restrictions, the state also doesn’t have a clear definition of a tiny house. As of the moment, the state considers tiny homes as Accessory Dwelling Units (ADUs). That means they don’t see tiny houses as legitimate living structures in which people can permanently live.

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