The concept of living in a tiny home is attractive and is, of course, a long-term dream for many Americans. Living in a tiny house allows you to trim your budget on top of downsizing the stuff you own. But does it happen in reality?
It is a no-brainer that tiny homes generate cheaper utility bills in comparison to regular (larger) homes. However, if you are planning to own these miniature homes, you will likely contemplate the idea of dealing with property taxes.
So, do you have to pay property taxes on a tiny house? If your tiny house is laid on a foundation, it will likely be subject to local property taxes. If it’s on wheels, the simple answer – NO.
A tiny house on wheels is considered a recreational vehicle (RV) in most states, so the same personal property taxes levied on mobile homes might apply. Depending on which state you live in, you may need to pay the property tax imposed on motor vehicles.
If you’re planning to move into a tiny house soon, here is all you need to know about personal property taxation as far as tiny houses are concerned. But before we delve into that:
Table of Contents
What is a tiny house?
Despite the tiny house being a well-established concept in the US, there is no official definition for the term. That said, a tiny house is generally considered to be a house with square footage not larger than 400 square feet. These small architectural structures come with lots of perks, including mobility and exemption from some local building codes.
Tiny houses come in two types, namely;
Tiny homes built on a foundation: Like regular homes, a tiny house can be erected on a foundation as a temporal or permanent structure. Most municipalities have become more open to tiny homes, especially when designated as accessory dwelling units (ADUs), located on the same lot as a single-family home.
Movable homes, tiny homes on wheels: Most tiny houses are built with movement in mind; that’s why they are set on wheels or built on a trailer. This gives you the freedom to move with your home whenever and wherever you wish.
For a single housing unit to be classified as a tiny house, it should have basic amenities like a kitchen, sleeping area, and washroom on top of being less than 400 square feet. Tiny houses should also be designed and built on the basis of affordability, environmental sustainability, and social community.
What is personal property tax?
Personal Property or property tax is an annual tax on what is considered personal property. According to General Property Tax Act, personal property refers to any movable property not attached to a building, including RVs, campers, furniture, tools and equipment, machinery, fixtures, and vehicles.
In some states, property tax also applies to anything that generates income. These may include taxes on furniture and equipment in a mechanic shop.
Although some states have stopped imposing personal property taxes, most states still collect Tangible Personal Property taxes on business.
What property taxes might your pay for your tiny house?
A tiny house set on wheels is considered a recreational vehicle (RV), so the same taxation rules will apply to your tiny house. Although property tax is not levied on tiny mobile houses, you need to keep an eye on other types of taxes.
Depending on where you live, you might be required to pay:
1. Sales tax
When buying a movable home, you may pay sales tax if your state collects it. Thankfully, some states, including Alaska, Montana, Delaware, Oregon, and New Hampshire, do not impose a sales tax. If your state levies sales tax, you can avoid paying it by registering your tiny mobile house in a state that doesn’t impose the sales tax.
Even so, this can be a bit trickier because some states require minimum years of residence for you to register an RV. Montana RV registration rule has a loophole.
2. Real estate transfer tax
This is a form of taxation levied on real estate transactions. Transferring property title carries a tax, which you must pay. Real estate transfer tax is determined depending on the market value and classification of the property and can be split between buyer and seller or paid by the seller.
3. Estate tax
If you are buying a tiny home from a person who died suddenly, you might pay estate tax. The estate tax is the equivalent of real estate transfer tax, but the buyer pays it in lieu of the seller.
4. Gift tax
Imposed on the transfer of property, this is the tax imposed on any personal property you donate worth over $15,000. While there are many exemptions to this tax, you might pay gift tax starting from 18%.
5. Generation-skipping tax (GST)
This is the tax levied on property transferred to a young person, at least 37 ½ younger.
Property taxes can significantly upscale owning a conventional home. Living in a tiny home is an excellent way to save on property taxes. Even if your local state government requires you to pay personal property taxes for a tiny house, it will be far much lower than you would pay for a traditional home.
Tax deductions for tiny homes
If you own a tiny home, you may also enjoy the following:
1. Mortgage interest tax deduction
This is a tax break that allows you to minimize your taxable income. Because a tiny movable house is still a house, owning one gives you a chance to claim a mortgage interest tax deduction.
2. Home office tax deduction
Are you a digital nomad? If you are planning to work in your tiny house, then you can claim a home office tax deduction to save on taxes.
Final thoughts
The idea of owning or living in a tiny home is charming. Tiny houses have cheaper utility bills and are relatively inexpensive to maintain compared to traditional homes. All the same, you might have to deal with intricate taxation rules and other possible hidden expenses.
For these reasons, it is extremely important for you to consult the tax authority before you can own one; otherwise, you may face unforgiving consequences.
