Property Tax: Definition, and How to Calculate Taxes on Real Estate
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Trading in a monthly rental payment for a mortgage payment might be an exciting milestone for first-time homebuyers. But the cost of owning property of course doesn't stop there.
Property taxes are one of the most common fees associated with owning a home; the size of your tax bill depends on where you live, and your property's value. Some states also charge property tax on other items, too.
What is property tax?
Property tax is a levy on certain types of physical property, such as homes, real estate and land. Local governments typically assess property tax, and the property owner pays the tax. The amount of tax due depends on the property's location and how much it’s worth.
Local and state governments collect property taxes to fund school districts, police and fire departments, road construction and other local services. The local taxing authority, likely your county but possibly your city or town instead, typically determines the tax rate, which then gets multiplied by your home's value, to determine your tax bill.
The term property tax is often used interchangeably with "real estate tax," but some states also assess property tax on personal items, such as cars, boats, aircraft, machinery and even livestock.
» MORE: Learn more about popular tax deductions for homeowners.
How property taxes work
Assessors (sometimes called appraisers) who work for the local taxing authority track the value of every piece of land and real estate in a taxing district, such as a city or county. They maintain databases of local property values, often using sophisticated mapping software.
To determine your property tax rate, your home's value is typically multiplied by the established property tax rate. Your home’s assessed value will likely be less than its market value. By how much less will vary by location, but it's common. The county may have many ways to detect changes in your home’s value, including inspections, permit applications from a remodeling project, reports from neighbors or regular updates.
Some states or local governments send a property tax bill annually, while others charge semi-annually or quarterly. Alternatively, property taxes can also be included in your mortgage payment, if you have an escrow account with your mortgage servicer.
How to calculate property tax rates
Property tax is typically determined by multiplying the value of the property by a tax rate: Property tax = value of the property x tax rate.
Your tax rate might not necessarily be expressed as a percentage, but rather as some number of mills, because real estate tax rates are also often based on the "millage rate," where one mill is equal to one-thousandth of a dollar. For example, if the local property tax rate on homes is 15 mills, homeowners pay $15 in tax for every $1,000 in assessed home value. Accordingly, a house with a $200,000 assessed value would be taxed $3,000.
Some taxing authorities apply the tax rate only to a portion of the home value rather than to the full home value. That can reduce the bill.
» Use our mortgage calculator to see how these taxes can affect your monthly mortgage payment.
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How to pay property taxes
Typically, there are two ways to pay the bill:
Write a check or pay online once a year, every six months or quarterly when the bill comes from the taxing authority.
If your mortgage includes an escrow account, your total mortgage payment likely factors in your property taxes. If your escrow account doesn’t have enough funds to cover all of your monthly costs, the mortgage servicer may need to pay using its own funds, which can lead to increased monthly mortgage premiums or an additional bill for you.
If you're trying to pay property tax online, find tax records, or wondering how much the tax is in your area, check out your home county’s tax assessor website.
Can you lower your property tax bill?
If you disagree with a property tax bill on your home, you can contest it by challenging your home’s assessed valuation. You’ll need to show that the assessed value doesn’t reflect your property’s true value. If successful, your appeal could result in a lower property tax bill.
Make sure the assessment data is accurate and matches the details of your property.
Gather comparable listings or ask a real estate agent to pull records of comparable sales for you. Often, tax records are available online from the local tax assessor.
Call your assessor’s office to learn the dispute process. Aim to show that homes with similar tax values are better than yours. Start by discussing your findings by phone or in person.
If you’re unsatisfied, you might be able to pursue the case with an independent tax appeals board.
How to deduct property taxes on your tax return
Homeowners can deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
You’ll need to itemize your taxes instead of taking the standard deduction if you want to deduct property tax. It’ll probably take more time to do your taxes if you itemize, but you could end up with a lower tax bill. Use Schedule A to figure your deduction.
And don't forget: You can also deduct mortgage interest on your tax return.
What happens if you don't pay property taxes?
Failing to pay your property taxes can result in the taxing authority placing a tax lien on the property. A tax lien is a legal claim against property or financial assets you own or may have coming to you. It’s not a seizure of your assets, but it is a claim on them. If you sell the asset, the government could be entitled to some or all of the proceeds.
Buyers and sellers often discover tax liens on properties by doing a title search.
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