Wild open spaces, clean air and water, solar power, organic food, a self-built homestead, and no utility bill. This is the off-grid dream of a growing number of people seeking freedom from the burdens of city life. If you’re planning to purchase land to live off-grid as cost-efficiently as possible, there are Property and Income Tax implications you need to be aware of.
All owners of land in the USA, no matter the size, are liable for Property Taxes on that land, irrespective of whether it’s off-grid or grid-connected. Furthermore, all off-grid earners of revenue are liable for Income Tax, even if they’re only selling home-grown produce to their neighbors.
With a bit of research, professional advice, and general legal savvy on the property and personal tax laws, you can realize your off-gridutopia. Read on and discover how ‘knowing your onions’ regarding off-grid tax obligations will mitigate your off-grid financial risk by making you fully IRS–compliant.
Property Tax Laws for Off-Gridders
Legalese isn’t everyone’s bag, but if you’re going to live the maverick life of an intrepid off-gridder, it’s wise to learn as much as you can about Property and Personal Tax Law as it applies to your specific location and vocation.
Here are the most important facts to know to keep you IRS-compliant and debt-free:
- In the USA, Property Tax, also called ‘Millage Rate’, is regulated and managed at the local government level.
- Millage Rates can be charged on both Real Estate and Personal Property (vehicles, business machinery, power tools, etc.).
- The taxation authority uses a formula to determine the rate of property taxation according to what is deemed ‘Fair Market Value’.
- These taxes are the Obligation of the Owner of the Property.
If it sounds complicated, it is. But plow on, forewarned is forearmed:
- All fixed structures to the land such as building and ‘permanent improvements’ (irrigation systems, dams, extensions to buildings, etc.) are considered by the taxation authority to be of ‘ownership interest’ and thus liable for taxation.
- There are local tax authorities in the USA that also impose a tax on personal property used for business purposes such as tools, various types of capital equipment (a bulldozer farm tractor, for example), and inventory (a stockpile of ‘for sale’ pecan nuts perhaps).
- The tax authority notifies the property owner of what the ‘determined value’ of the property is and how much tax the owner is liable for.
- If the property owner thinks the ‘determined value’ is too high (and thus the taxable rate too high), they can contest that value with another institution called a ‘Board of Review’.
Take note of this:
- Tax consultants advise that Property Tax is especially onerous on capital-intensive businesses.
- Essentially, the more you invest in permanent structures on your off-grid property, the more tax you’ll pay, so ‘living light on the land’ is an obvious strategy to follow to avoid a hefty tax bill.
- The same applies to non-fixed assets used for business purposes like farming equipment.
Fortunately, Off-Grid living generally steers clear of ‘capital intensive’ endeavors, but it’s prudent to know what fixed assets on your land are taxable.
Pay Lower Property Taxes
The rate of Property Tax you will pay the local tax authority will depend on where your land is located, so scout for land with this in mind.
- You need to know the authorities’ official ‘classification’ of the land. These ‘classes’ include ‘residential’, ‘commercial’, ‘industrial’, ‘vacant’ and ‘blighted’ Real Estate.
For aspirant off-grid buyers looking for cheap land in the middle of nowhere, there is a provision in US Property Tax Law that effectively reduces the taxable rate on a property located in an area where no recent sales of adjoining properties have occurred.
Because an assessor can’t establish a ‘real time’ value of property in the area, a ‘cost-based’ calculation is used where depreciation of the asset (crumbling buildings, soil erosion, etc.) is taken into consideration and its value reduced, along with its taxable amount.
As mentioned, Property Tax is a complex business fraught with red tape. After doing your research into Tax rates governing your desired plot of land, seek professional advice from a tax lawyer before you sign the title deed.
Choose your state wisely. A quick Google search will show you which states have the lowest Property Tax rates in the USA:
- Hawaii has the lowest property tax rate – 0.30%,
- New Jersey has the highest – 2.21%.
- Wyoming (a popular off-grid haven) is ranked the fourth cheapest state as far as property tax is concerned – 0.55%.
- The average home in Wyoming is valued at around $256 000, and the annual property tax bill is approximately $1 400.
Note: If you are a ‘qualified homeowner’, you may be eligible for reduced property tax rates via tax exemptions and credits in certain states.
Tip: Once you’ve chosen a potential site for your off-grid homestead, buff up on all the critical survival and success factors, including what the county ordinances and codes are concerning your off-grid utilities action plan.
Personal Tax for Off-Gridders
Arguably the biggest consideration for wannabe off-gridders is earning an income in the middle of nowhere. Naturally, farming is the obvious route to both self-sufficiency and revenue generation to purchase whatever can’t be grown or manufactured on the off-grid homestead.
All income from the sale of farm produce is taxable by the IRS, so be careful when registering your business status (Sole Proprietorship, Close Corporation, Limited Liability Company or Business Corporation). Each classification has its tax rate and set of governing statutes.
Sole Proprietorship is the most popular class of registration for farm businesses in the USA because farmers are taxed at an individual level, rather than at a corporate level, effectively paying a lower tax rate.
The good news for budding micro-farmers:
- According to ‘individual income’ tax statutes, revenue from 97% of all farms is taxed as ‘personal’ income and not as ‘corporate’ income.
- Farmers receive several tax breaks and are taxed more favorably than most commercial enterprises.
- Environmentally conscious farmers can also access funding and subsidies to undertake ‘green’ endeavors on their land, including soil rehabilitation, groundwater conservation, wildlife care, and forest preservation.
Remember – Avoid over-capitalization on buildings and fixed farming infrastructure. If you are going to farm, use the natural resources carefully and take advantage of tax rebates and grants for ‘conservational’ farming available from the government.
Again, consult a Personal Tax lawyer to get advice relevant to your chosen off-grid vocation, be it farming or otherwise.
- There are additional legal compliance obligations beyond tax payments that you should research and include in your long-term off-grid strategy, like ordinances and codes on land usage, building structures, and environmental protection.
A life far away from the city makes perfect sense, especially today with technologies like solar power and hi-tech composting toilets readily available and within the budget of the average city worker.
A YouTube search will show hundreds of off-grid success stories with tips and insights on how to avoid pain and establish a sustainable life without a horrible utility bill every month or a hefty chit from the taxman.
Most importantly, research thoroughly all aspects of property taxation governing your chosen piece of paradise. Get answers to all your questions from local counselors and real estate agents. Email the IRS if you have to.
It’s your money on the line so protect yourself before you commit financially – get a tax lawyer in your stable!