I love paying property taxes! Said no one. Ever!
We know we have to pay them, yet most of the time, we don’t know why or where that money goes.
Whether you are a first-time home buyer or a seasoned pro, property taxes are a part of your bottom line.
And guess what, they’re inevitable. Like them or not, they are a part of home ownership (#adulting).
If you ever think to yourself, “What are property taxes, and why do I have to pay them?” Keep reading. You are about to learn the essentials, the ins and outs, and even some of the nitty-gritty about real estate taxes.
Let’s get started with the property tax definition
In layman’s terms, a tax levied on real estate and sometimes other property that you own is the property tax definition. It is calculated by the local government, based on the value of the property, and paid by the homeowner. The amount of tax you’ll pay is based on the location of the property and how much it’s worth.
That is the basic definition, but there’s a lot more. So, let’s look deeper.
Real estate tax vs. property tax: what’s the difference?
The terms real estate taxes and property taxes are generally interchangeable. However, sometimes property taxes can include personal property, like furniture and cars–movable elements. Whereas real estate taxes only refer to homes, rental, and vacation properties– immobile objects.
In short real estate tax vs. property tax can be broken down to what is fixed to the land is real estate and property tax can be tangible goods like vehicles and boats.
To fully understand real estate taxes, you should know which category of taxes they fall under. Let’s take a look.
What type of tax is property tax? Let’s break it down.
Taxes divide into three main categories: regressive, proportional, and progressive.
Regressive taxes
Property tax is a regressive tax. Everyone pays the same percentage regardless of their income. Low-income individuals are hit much harder than those with higher salaries because they pay the same amount.
For instance, if the property tax rate in your town is 2%, then you and your friend across town both pay the same percentage, regardless of the amount you earn.
Examples:
- property taxes
- sales tax
- excise taxes
- sin taxes
Proportional taxes
Also known as a flat tax. Everyone is charged the same percentage rate regardless of income. It doesn’t change if your income increases.
For example, if the income tax is 10%, then a person making $50,000 a year pays 10% ($5000). If their neighbor is earning $600,000, they also pay 10%, which is $60,000.
Currently, there are nine states which have adopted this income tax system: Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah.
Examples:
- per capita taxes
- gross receipts taxes
- occupational taxes
- payroll taxes
Progressive taxes
With this system, your tax liability rises as your income increases. Wealthy individuals pay more taxes than those in the middle or lower income brackets. It is based on the taxable amount of your income.
Currently, the federal income tax is progressive. The percentage gets progressively higher as your income increases. Someone earning $50,000 will pay a lower percentage rate than someone earning $600,000.
Example:
- Estate taxes
Now that you know the property tax definition, we can get into the nitty-gritty of how they are calculated.
How are property taxes calculated? Are you curious?
If you are a new homeowner, estimating these taxes is crucial to your bottom line. It’s a good idea to calculate them before buying a house, so you aren’t blindsided. You can research the previous tax records of a home here.
If you are a current homeowner, you have probably been sent a real property tax statement detailing the tax amount. Either way, it’s vital to understand the basics of how they are determined.
To calculate your real property taxes, you need to know two things: the value of the property and the local tax rate.
value of the property X local tax rate = property tax
Value of the Property
The value of the property isn’t based on what you think it is worth or even what you paid for it. County property assessors regularly appraise the value of your home based on their knowledge of other similar homes near yours. Usually, their valuation is a little lower than the actual market value, but don’t stress, that’s ok! The amount of taxes you pay is based on that assessed lower value.
The value is only half the equation. Let’s delve into the other half of the equation – the local tax rate.
Local Tax Rate or Mill Levy
The regional government sets the property tax rates, so the amount you pay is in direct correlation with where you live. The figure varies based on the public amenities available and the revenue required by the local government.
For instance, if you live in a condo in down Manhattan, the New York City property tax rate will be higher than the bill from the Buffalo assessor for a house in the suburbs of Buffalo, in upstate New York.
Most of the time, your tax rate is shown in percentages, and other times it is based on a mill rate. One mill is one-thousandth of a dollar. If the local property mill rate is 18 mils, you will pay $18 for every $1000 in assessed value. If your home is valued at $200,000, then the tax bill would be $3600.
You can find your area’s tax rate on your local assessor or municipality website.
So, how does your county come up with these rates? Let’s take a closer look.
How does your municipality come up with a tax rate?
The local government takes a look at the expected annual revenue from various sources, including sales tax and state aid. It compares it to the yearly budget. The deficit is where the tax rate comes into play and fills that gap.
For example, let’s say Livonia, Michigan, has a $2.5 million budget. It receives $1 million in revenue. That $1.5 million gap is what Livonia’s property taxes needs to cover.
If you are planning to buy a home, you can plug the address into realtor.com and get a ballpark figure of your property. Thankfully you won’t have to calculate your property taxes yourself. However, it is still important to educate yourself on how it is determined.
It is also essential to recognize that your property taxes can change. If you build an addition to your home, the assessed value may go up, and so might your taxes. As your city’s deficit grows, so may your tax bill.
Now you know how real property taxes are determined. The next step is to learn how to pay them. Let’s keep going.
How to pay your property taxes
Although each county tax bill is paid differently, there are several options:
1. Pay online when you get the bill
Depending on where you live, you may pay quarterly, bi-annually, or annually.
You can pay 24/7 with a checking account or credit card. To access your account info, you will need your assessor’s identification number (AIN), which is also called an assessor’s parcel number (APN) or parcel identification number (PIN), which is printed on your tax bill.
2. Pay monthly with your mortgage
When you pay the mortgage, you can set it up so that you are also paying the taxes. Instead of getting one large bill annually, which might cause a heart attack, you can pay it off monthly. Your lender does the calculation and makes the payment on your behalf, making it an easier pill to swallow. Many lenders require this because they want to be sure property taxes are paid on properties for which they are lending money.
You pay the lender, and they put it into an escrow account for you. They will pay the taxes for you when they are due.
However, you are only paying an estimate of the tax bill, so you might have to pay a little more or receive a refund at the end of the day.
In some counties, you can pay in person at a bank or municipality, pay by mail, pay by phone, or auto-pay. To find out which options are available to you, contact your county tax collector.
You’ve paid off your mortgage…now what?
After you pay off your mortgage, you’ll still have to pay your property taxes. However, you’ll have to switch up your payment method.
Most likely, you will pay it online. But if the idea of forking over a lump sum all at once makes a pit in your stomach, do what your lender did. Divide the yearly payment into 12 and put it into a savings account or just set it aside monthly. That way, you won’t be scrambling for the money when you get the bill.
If you fail to pay your taxes, the government can place a tax lien on your home. When you go to sell it, they will take their cut first, before you get any of the proceeds. The worst-case scenario is that they seize your home.
Great, so you’ve paid your bill. But where exactly does this money go? Let’s find out.
What do property taxes pay for?
Anything that betters a community is paid for with your tax dollars.
If you have public schools in desirable districts, playgrounds and parks, a large police force, and a full-time fire department, your property tax assessment will be higher than an area without those amenities. When you see someone finally fixing that pothole that you’ve sunk your tire into countless times, it’s probably your tax dollars at work.
Without the money raised from these property taxes, the local government wouldn’t be able to fund programs and public services.
How that money is used is up to the individual governing body. One town may use it to fix the potholes after a brutal winter. Another may use it to hire more police officers to fight a gang problem.
You’ve made it through the basics and the nitty-gritty. Now we can move on to what you’ve been waiting for… how to lower property taxes?
Let’s dive into how to get a property tax reduction.
Just because the county hands over a bill, doesn’t mean you have to accept what’s on it. There are ways to reduce the amount you pay, and some of them are relatively painless.
Tax Card Verification
The assessed value of your home is one of the primary factors in calculating your tax bill. So, the first step is to get a hold of your tax card and verify everything. Your tax card has all the stats about your home like the lot size, home size, mortgage info, and what year it was built.
Assessors can’t visit the inside of every home every year, so they base the value on these records. Once you have your tax card in hand, verify that all the information is correct. If it says you have three bathrooms, but you only have two, tell the assessor. If any info is incorrect, that will affect the value of your home.
The tax card can be found here or at the local assessor’s office.
Exemptions
One of the easiest ways to get a property tax reduction is to apply for exemptions. They vary from state to state, but a quick google search will explain which ones are available. One of the most overlooked tax breaks is the veteran tax exemption.
Below are the most common ones in most states:
- The senior tax exemption is based on age but also varies from state to state.
- The veteran tax exemption is generally for anyone who has served in the military, or their families. To see if you qualify for the veteran tax exemption go here.
- The exemption for people with specific disabilities is for people who can’t work because of a mental or physical condition. You will have to show proof of the disability. If you are receiving disability benefits, that should suffice.
- The agriculture exemption is for land that can be classified as farmland.
- The homestead exemption is probably the easiest one to achieve. In most states, if your home is your primary residence, you will qualify.
There are more prerequisites for each exemption, and they also vary from state to state. Be sure to find out what the rules are where you live.
Why are my property taxes higher than my neighbor’s?
It’s time to check out your neighbor’s tax bill. No, this isn’t to be nosy. But if your neighbor’s house is the same as yours, but he’s paying $1000 less, something isn’t right. If you both have a 2000 square foot, 3-bedroom, 2-bathroom home on the same size lot, with a two-car garage, you should be paying the same.
But pay attention to the details, be sure you are comparing apples to apples.
If you don’t want to ask your neighbor, you can find their tax info here or at the county tax office.
If you are paying more, find a few other similar homes in the neighborhood to compare. If you still think you’re overpaying, head to the assessor’s office with all of your research and file a claim for a property tax reduction.
You can also use real estate websites like Redfin, Trulia, and Zillow to find a tax estimate.
Reassess your property
Only do this if you are sure your property is overvalued. Otherwise, it could backfire, and you might end up paying more.
When the assessor comes, walk through your home with them. Show them all the flaws and details that you know about. You know your home better than anyone. Share those little details with the assessor so it can be appropriately valued.
Hopefully, this will result in the value of your home being lowered, which, in turn, will reduce your tax bill.
Dispute your tax bill
If you’ve gone through all the steps and still feel like your bill is too high, it is time to dispute it. But first, check the assessor’s procedure for filing an appeal. There may be a limited time frame to enter your paperwork.
To start that process, you’ll need to contact a real estate tax attorney.
Well done! You’ve made it through the essentials, the ins and outs, and the nitty-gritty!
The Final Word
Now you’re a pro and should have a better handle on property taxes.
No one likes paying them, but at least now, you’ll know where that money goes and how to lower your bill.