Everything You Need to Know About Property Taxes

After a period of record-breaking low mortgage interest rates, the housing market in the United States has started to slow down. With the prices of homes leveling out after a volatile couple of years, you may have recently purchased your first home and are curious about what you should know about property taxes.

What is Property Tax?

Property tax is a tax paid on real estate or other types of properties you own. It’s also a type of ad valorem tax, meaning this tax is based on the assessed value of the property. Generally, property tax is based on the location of the property and assessed value of the property. 

Property tax is typically assessed and collected by state and local governments on an annual basis. They can vary significantly within a state and even between neighboring counties. 

Key Takeaways: 

• How is property tax calculated? Property tax is determined by multiplying the assessed value of your property by the basic levy rate, which is a percentage set by the municipal tax authority. In some cases special assessments are also included in the total property taxes assessed.
• Why do we have property taxes? Property taxes are local taxes that fund local government programs and help pay for services and projects that benefit your community.  
• What is the difference between property taxes and real estate taxes? Used interchangeably, but they aren’t the same. Real estate tax is a type of property tax – not all property taxes are real estate taxes. Real estate taxes are assessed on real property like your home, and other property taxes like personal property taxes are assessed on tangible and movable property you own, like vehicles.

How is Property Tax Calculated?

Property tax is typically calculated by multiplying the value of the property by the basic levy rate: 

Assessed Value x Levy Rate = Property Tax 

For example, if the assessed value of your home is $200,000 and your county levy rate is 2% then your property tax would be $4,000 ($200,000 x .02 = $4,000). Your property tax bill is typically paid annually to your tax assessor or it can be split monthly and paid with your mortgage payment. Your lender will then send the property tax you paid with your mortgage payment to your tax collector.

What is the Assessed Value of Property?

The assessed value of your property is not to be confused with the price you paid for your home or the price you could sell it for – those are considered the “appraised value” or “market value.” The assessed value of your property is given by the local government’s tax or property tax assessor. This assessed value is typically lower than the market value of the property. This works in your favor since your property tax will then be based on that lower value. 

Finding out the assessed value of your property is fairly straightforward. It should be stated on your most recent property tax bill or you can perform a quick search for your property on your  property tax collector or tax assessor website. 

What is a Levy or Tax Rate? 

The levy or tax rates are set by local governments and authorities and will vary depending on where the property is located. Property tax rates can vary significantly within a state and between neighboring towns can be subject to different rates. 

It’s possible that your levy or tax rate is expressed as a “millage rate” instead of being expressed as a percentage. Simply stated one “mill” is equal to one-thousandth of a dollar. So if your local property tax rate is 10 mills then you would pay $10 for every $1,000 of the property’s assessed value. So if your home has an assessed value of $200,000 at 10 mills, you would be taxed $2,000 ($200,000 x .010 = $2,000). Sometimes taxing authorities only tax a portion of the assessed value rather than the whole thing to help reduce the tax bill. 

It’s important to note that these property tax rates are not permanent and can change. Keep up to date on your county or city’s property tax rate and assessments to avoid a surprising tax bill.  

Why Do We Have Property Taxes?

Property taxes are used to fund many services and initiatives that impact everyday life. Property taxes finance local government programs such as police officers, fire fighters, libraries, road maintenance, community pools, and community activities. These services and projects provided by property taxes benefit the community where you live.

What is the difference Between Personal Property Tax and Real Estate Tax?

The terms property taxes and real estate taxes are often used interchangeably. However, while it is true that real estate tax is a type of property tax – not all property taxes are real estate taxes. 

Real estate taxes are only on real property like your home or rental property but personal property taxes are levied on movable personal property like vehicles. Businesses are also required to pay property taxes on personal property they own or lease like machinery, fixtures, office furniture, and equipment.

How Do I Pay Property Taxes?

There are typically two ways that people pay their property tax bill: 

1. Once the tax bill arrives (annually or every 6 months) you go online and make a payment or pay via check. 
2. Monthly when paying your mortgage, if you have an impound account and your lender sets aside the money you pay for property taxes in an escrow account to pay the property tax bill. Think of the escrow account as a savings for when the property tax bill arrives. 

What if I Don’t Pay my Property Taxes?

Not paying your property taxes can result in the taxing authority placing a tax lien against your property. A tax lien is a legal claim against the property or other financial assets that you own. A tax lien does not take possession of your property but if you were to sell the property, the local government could be entitled to some or all of the proceeds from the sale of the property or asset to cover unpaid property taxes. 

How Do I Deduct Property Taxes on My Tax Return?

If you can itemize your deductions (instead of taking a standard deduction) you can deduct up to a combined total of $10,000 ($5,000 if you are married filing separately) in property taxes and either state and local income taxes or sales taxes on your tax return. 

Don’t worry about knowing tax rules, TurboTax has you covered and will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers. Meet with a TurboTax Full Service expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.