Understanding Property Taxes: How They Work & Calculating Them

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Understanding Property Taxes: How They Work & Calculating Them

Property taxes are a significant part of homeownership. Millions of homeowners navigate property taxes annually, and understanding their assessment is vital in managing this expense. This guide outlines the assessment process, exemptions, calculation methods, and critical considerations, shedding light on this crucial aspect of homeownership.


What Is a Property Tax?

Cities, counties, and school districts impose property taxes on properties within their limits to fund various services. These levies are combined to compute property taxes, establishing the total tax rate, referred to as a mill rate, for a specific State. The mill rate is then applied to a property's assessed value, resulting in higher payments for those with more valuable properties. As a result, millions of homeowners are required to pay property taxes annually.


Assessing Property Tax

Based on their types, properties undergo distinct tax assessments for land and structures. Vacant land typically holds a lower assessed value than developed parcels, resulting in lower taxes. Access to public services might elevate the land's assessment and increase taxes if assessors foresee its developmental potential.


Property taxes significantly contribute to the financial reserves of city and county governments. These local entities convene to set tax rates and hold budget hearings to allocate funds for diverse services, including education, transportation, and emergency provisions.


Moreover, the Tax Cuts and Jobs Act (TCJA) imposed a cap of $10,000 annually (or $5,000 for married individuals filing separately) on federal tax deductions for state and local taxes (SALT), encompassing real estate, income, and sales taxes. The TCJA's provisions, introduced in 2018 and set to expire after 2025, may witness alterations through the proposed federal American Families and Jobs Act of 2023.


How To Calculate Property Taxes

Property taxes are usually computed by multiplying a property’s assessed value by the local tax rate. Still, the specific method can vary based on your state and county regulations.


Below, we delve into the step-by-step process to provide a more in-depth understanding.


  1. Determine The Property's Assessed Value


Determining the assessed value of your property is crucial for calculating property taxes. Local assessors evaluate your home based on similar properties, prevailing market conditions, and square footage. Sometimes, municipalities conduct appraisals to establish the assessed value.


It's important to note that the assessed value typically differs from the home's market or appraised value. Instead, the local government often applies a percentage of this standardized value, the assessment ratio, to ascertain the property's assessed value. This ratio represents the portion of the home's value subject to taxation and varies widely across regions.


For instance, if your home's market value is $300,000 and your local government taxes 60%, the assessed value would be $180,000 rather than $300,000. This assessed value becomes the foundation for calculating your property tax obligations.


  1. Deduct Qualifying Exemptions


Various regions provide property tax exemptions, often facilitating homeowners in managing their tax obligations. These exemptions can significantly reduce or eliminate property tax bills for eligible individuals.


As a homeowner, exploring potential exemptions you may qualify for is valuable. The subsequent sections contain details about some prevalent property tax exemptions:


Homestead Exemptions:


Homestead Exemptions are commonly available and provide a reduction or discount on property taxes for those who reside in the property as their primary residence. It's important to note that this exemption is not applicable if the property is used as a vacation getaway or an investment property.


Senior Citizen Exemptions:


Numerous regions provide senior citizen exemptions that either reduce real estate taxes or maintain them at a fixed rate. Eligibility typically requires reaching a specific age and residing full-time in the property. This exemption proves particularly beneficial for individuals relying on a fixed income.


Homeowners With Disabilities Exemptions:


Disabled homeowners, whether veterans or civilians, might qualify for tax exemptions that alleviate or eliminate their tax obligations. Governments establish varying rules and exemptions, often contingent on the extent or severity of the disability, providing avenues to ease the tax burden for eligible individuals.


Veteran Exemptions:


Individuals who are veterans or currently serving in active-duty roles and reside full-time in a home may be eligible for property tax exemptions. Verifying your eligibility for this specific exemption is recommended by contacting your local and state government authorities.


  1. Apply Your Municipality’s Millage Rate


Property taxes are often represented in millage rates, which indicate the tax paid per $1,000 of a home’s value. Although it may seem complex, a straightforward formula helps determine your property tax liability.


Start by identifying your county’s mill rate and dividing it by 1,000. Then, multiply this mill rate by your home’s assessed value (not the appraised value) to compute your property tax responsibility.


For instance, if your area’s mill rate stands at 8.5 and your home’s assessed value is $180,000, follow these steps:


8.5 / 1000 = $0.0085


$180,000 x $0.0085 = $1,530


This calculation indicates an annual tax payment of $1,530. However, eligible exemptions might reduce your property tax burden. For example, with a $50,000 homestead exemption, your assessed value would adjust to $130,000, leading to an annual property tax liability of $1,105.


Property Tax FAQs

The following are some frequently asked questions about Property Tax.


  1. How can I pay my property taxes?


Payment methods for property taxes vary by county. Some localities collect them annually, while others require quarterly or semi-annual payments. You can pay the total amount by the due date or set up an escrow account as part of your monthly mortgage payment, which holds funds for your tax bill until it's due.


2.What if I disagree with my property tax assessment?


If you disagree with the tax amount, you can appeal it. Each area has distinct procedures for appeals, ranging from written requests to in-person hearings. Visit your locality's website to understand the process and applicable deadlines.


  1. What if I refuse to pay property taxes?


Failure to pay property taxes can result in a county placing a lien on your property. This grants them the primary claim to the proceeds when you sell the home unless the lien is resolved before the sale.


  1. Can I claim property taxes on my federal income taxes?


As of the current regulations, you can deduct real estate taxes from your federal income taxes if levied for the public welfare. However, rules regarding this deduction can change. It's advisable to seek advice from a tax professional before pursuing property tax deductions.


The Bottom Line

Ultimately, property taxes are an unavoidable part of owning a home. For those contemplating homeownership, comprehending the comprehensive costs beforehand is crucial. Throughout the home-buying journey, seeking preliminary mortgage approval can offer insights into your potential home purchase budget.


"Mortgage Dove makes home financing convenient for every American. You can count on us to provide a home buying experience tailored to your personal needs and financial situation. We strive to give you the peace of mind that your home financing goals can be achieved.”


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