California buyers have flocked to Montana in recent years, snapping up vacation homes and mountain retreats across Big Sky Country. Today, they collectively own more than $9.5 billion in Montana residential property—more than 5% of the state’s taxable real estate market.

But their tax contributions haven’t kept pace. In the most recent tax year, Californians accounted for just 3.54% of the state’s residential property tax revenue.

That imbalance is now at the heart of one of the most sweeping property tax reforms in Montana history. A new law aims to ease the burden on full-time residents by shifting more of the tax load onto second-home owners—especially those with high-value properties.

Supporters say the change is long overdue; critics say it’s risky.

The out-of-state effect on Montana real estate

Montana’s housing market boomed in the early years of the COVID-19 pandemic as remote workers and out-of-state buyers—especially from high-cost states like California—snapped up scenic getaways and second homes. In 2021, second-home purchases accounted for up to 20% of all home sales statewide, according to Realtor.com® analysis of Optimal Blue data.

Luxury markets like Big Sky, Flathead County, and Bozeman became magnets for wealthier buyers, many of whom bought properties as seasonal or vacation homes—not primary residences.

That surge has since slowed. From mid-2023 to mid-2024, Montana added fewer than 6,000 new residents—its slowest growth rate in more than two decades, according to the U.S. Census Bureau. Rising home prices, low inventory, and the fading appeal of remote-first living have made the state less accessible.

Yet home prices remain elevated, leaving many full-time Montanans stuck—unable to afford a move or struggling to pay property taxes on rapidly appreciating homes. The dynamic has grown so stark, it even anchored the final season of "Yellowstone," but the real tension is unfolding offscreen in places like Bozeman and Big Sky, where luxury purchases have become the norm.

Dating as far back as 2016, “properties owned by out-of-state addressees tended to be more valuable,” explains Dylan Cole, an economist with the Montana Department of Revenue. “And that difference has exacerbated since then.”

Who owns and who pays

As Montana home values have climbed, so, too, has the question of who’s footing the state’s property tax bill. While there’s no official residency test to distinguish full-time Montanans from out-of-state homeowners, mailing addresses offer a useful—if imperfect—proxy.

By that measure, Montana residents own about 77% of the state’s taxable residential real estate but pay 84% of total property taxes.

That gap reflects how Montana’s system structurally benefits high-value properties in clustered markets with low mill rates, often resort communities.

“Higher-valued properties drive down mill rates since a lower tax rate yields the same revenue when levied against a larger base,” according to Cole.

Until recently, the state applied a higher marginal tax rate to residential improvements valued above $1.5 million. The idea was to ensure that high-value homes paid more. But in practice, that structure didn’t always overcome the built-in advantages available to second-home owners in Montana’s resort communities.

In places like Big Sky and Flathead County, where expensive homes dominate the landscape, local governments can raise the same amount of revenue with lower mill rates—the rates applied to taxable value. As a result, many of the state’s most expensive properties benefit from lower effective tax rates, even as their values skyrocket.

What’s changing

Montana’s new law lowers property tax rates for full-time residents while increasing taxes on second homes and short-term rentals, among a few other classes of property. For primary residences and long-term rentals valued at or below the state’s median home price (around $340,000), the tax rate drops to 0.76%. Homes worth more will be taxed in tiers: 0.76% on the first $340,000, then gradually higher rates—up to 1.9% on any value over four times the median.

In contrast, second homes and short-term rentals will be taxed at a flat 1.9% on their full value, regardless of price. The goal of the law is to ease the tax burden for year-round Montanans while shifting more responsibility to out-of-state buyers and investors who have contributed to rising home prices across the state.

While it sounds like a common sense approach to a complex problem, Manish Bhatt, senior policy analyst at the Tax Foundation, foresees unintended consequences.

“What ends up happening here is, as property values surge, it could be a real windfall for local governments,” he explains. “But shifting the burden from certain classes of property to others could have a real distortionary effect in the market.”

In other words, luxury neighborhoods that benefit from low mill rates could see revenue booms for local governments, while tax relief for primary residences might result in funding shortfalls elsewhere.

Bhatt notes that Montana isn’t alone in grappling with this issue—and warns that without structural guardrails, well-intentioned systems can backfire.

“The state would do very well to make sure there’s broad reform that includes stronger levy limits,” he adds, “so revenue growth doesn’t outpace what’s needed to fund local government.”

What it means for California owners and other out-of-state buyers

For California residents and other out-of-state buyers who own second homes in Montana, the new homestead law could lead to significantly higher property tax bills. Unlike full-time Montana residents, these homeowners won’t qualify for the lower, tiered rates. Instead, their properties—whether vacation homes or short-term rentals—will be taxed at a flat 1.9% on the full value.

This shift could have a chilling effect on Montana’s high-end second-home market. With steeper tax costs, some prospective buyers might reconsider future purchases, while others could look to neighboring states with more favorable tax structures. Already, policy experts have raised concerns that measures like this could prompt wealthy buyers to redirect investments to states like Idaho, Colorado, or Wyoming.

Will other states follow?

Montana’s bold move to tax second homes and short-term rentals at a higher rate is already drawing national attention—and it might be just the beginning.

“We are already picking up informal chatter among colleagues in other states—especially at forums like the National Conference of State Legislatures,” state Rep. Llew Jones, one of the key architects behind Montana’s legislation, shared via email. “It’s clear that many states are facing similar pressures from out-of-state buyers and affordability challenges, and Montana’s model is being closely watched.”

Jones points to neighboring states like Idaho, Colorado, and Wyoming, where surging property values—fueled in part by nonresident demand—have created similar challenges. And indeed, those states might soon face an exacerbation of these challenges as second-home owners flee Montana.

Still, tax policy experts warn that the true test will come in implementation—and that shifting the tax burden without deeper structural reform carries risks.

“States have considered it a lot,” says Bhatt. “I think there’s lots of examples of states trying to think through this and not doing it with sound tax policy.”

And while Montana’s approach is being closely tracked, Bhatt remains skeptical that it will spark a broader movement.

“Tax shifts are not tax reform,” he explains. “They're just moving the pot of money that you're taking from one pocket to the other.”

Whether Montana’s strategy becomes a national model—or a cautionary tale—will depend on what happens next: whether the reforms truly deliver relief to local residents, whether second-home demand begins to cool, and whether other statehouses decide the risk is worth the political reward.

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STORY By Allaire Conte