Real Estate Taxes vs. Property Taxes - Insights for Homeowners

Real estate taxes and property taxes are crucial for funding local services like schools, roads, and emergency services. Real estate tax, often called property tax, is a yearly or twice-yearly payment based on your home's assessed value. Property tax, however, also includes taxes on other personal items like vehicles. Knowing the differences and how these taxes are calculated can help homeowners manage their finances better and stay compliant with local laws.

What is Real Estate Tax?

Real estate tax, also known as property tax, is a yearly or twice-yearly payment that homeowners must make to their local government. How much you pay for the tax is based on the assessed value of your home. This value is calculated by taking the home's fair market value and multiplying it by a percentage determined by your local government. The tax rate can vary widely depending on where you live.

What is real estate tax?

Generally, people living in big cities pay higher real estate taxes than those in rural areas because property values are usually higher in urban locations. This tax is crucial for funding local services like schools, roads, and emergency services.

What is Property Tax?

Property tax covers both real estate taxes on land and homes, as well as taxes on other personal property items. While real estate taxes apply to land and buildings, personal property taxes are levied on movable and tangible assets like vehicles. The tax rates can vary significantly depending on the location and the specific item being taxed.

Personal property taxes are typically much lower than real estate taxes, and some items may not be taxed at all. For example, vehicle registration fees, a type of personal property tax, can be as low as $5 annually in certain areas.

Real Estate Taxes vs. Property Taxes - What are the Differences?

Real estate taxes and property taxes, though often used interchangeably, have some distinct differences. Real estate taxes, which are levied on land and homes, are significantly higher than personal property taxes, such as those on vehicles. Even modestly valued homes can incur thousands of dollars in real estate taxes annually, whereas vehicle property taxes typically amount to only a few hundred dollars.

One key advantage of real estate taxes is their deductibility on federal tax returns; homeowners can deduct these taxes as an expense if they itemize deductions on Schedule A. Personal property taxes on items like boats or RVs can also be deducted, but these deductions are generally much smaller. The primary reasons for these differences lie in the higher assessed values of homes and the higher tax rates applied to real estate compared to personal property.

How To Calculate Property Taxes?

Step 1: Calculate the Assessed Value of the Property

Calculating property taxes begins with determining the assessed value of the property. This value is established by local assessors who consider factors like similar home values, current market conditions, and the property's square footage. While some regions conduct home appraisals to set this value, the assessed value is distinct from the market or appraised value of the home.

Local governments often use a specific percentage of the home's standardized value, known as the assessment ratio or taxable portion, to calculate the assessed value. This ratio varies widely across different areas. For example, if a home's market value is $300,000 and the local assessment ratio is 60%, the assessed value would be $180,000. This assessed value is crucial as it forms the basis for calculating property taxes.

Step 2: Subtract Eligible Exemptions

After determining the assessed value of your property, the next step in calculating property taxes is to deduct any qualifying exemptions. Most areas offer various property tax exemptions to help homeowners manage their tax bills.

One common exemption is the Homestead Exemption, which provides a discount on property taxes for homeowners who live in their property full-time; this exemption is not available for vacation or investment properties. Another valuable exemption is for senior citizens, which can either discount or freeze real estate taxes at a specific rate. This exemption is particularly beneficial for seniors on a fixed income, requiring that the homeowner be of a certain age and live in the property full-time.

For homeowners with disabilities, many local governments offer exemptions that can significantly reduce or even eliminate their tax liability, with eligibility depending on specific local rules. Additionally, veterans and active-duty service members may qualify for veteran exemptions, which are available for those living in their home full-time and are determined by local and state governments.

Step 3: Apply the Tax Rate Set by Your Local Municipality

The final step in calculating your property taxes is to apply your municipality’s millage rate. Property taxes are typically expressed as millage rates, which represent the amount of tax per $1,000 of the property's assessed value.

To determine your property tax liability, you first need to know your local county’s mill rate and then divide it by 1,000. Next, multiply this rate by your home’s assessed value, not the market or appraised value.

For example, let’s say your home’s assessed value is $200,000, and your county’s mill rate is 10. To calculate the property tax, you divide 10 by 1,000 to get $0.01. Then, you multiply $200,000 by $0.01, resulting in an annual property tax of $2,000. If you qualify for any exemptions, like a $50,000 homestead exemption, you would subtract the exemption from the assessed value, reducing it to $150,000. Reapplying the mill rate to this new assessed value would lower your annual tax bill to $1,500.

FAQs

How to Pay My Property Taxes?

Paying your property taxes depends on the rules in your county. Some counties want you to pay all your property taxes at once every year, while others let you pay in smaller chunks, like every three or six months. As a homeowner, you've got a couple of choices for paying your property taxes. You can pay the whole tax bill by the deadline set by your local tax office. Or, you can set up a special savings account, called an escrow account, through your mortgage lender. With an escrow account, a bit of your monthly mortgage payment is put aside to cover your property tax bill when it's due.

What Occurs if I Don't Pay My Property Taxes?

If you fail to pay your property taxes, the county can take action by placing a lien on your property. This lien essentially means that the county has a legal claim to your property, giving it priority over any other creditors when the property is sold. Before the sale of your home can be completed, the lien must be resolved, either through payment of the overdue taxes or other means. However, if the taxes are paid off before the sale, the lien is removed, and the transaction can proceed smoothly. It's essential to address any overdue property taxes promptly to avoid potential complications and ensure the smooth transfer of property ownership.

What Should I Do if I Disagree with My Property Tax Bill?

When homeowners disagree with their property tax bill, they have the option to appeal the amount. However, the appeals process varies across different local jurisdictions. Some areas accept written appeals, while others require in-person appearances. To understand the specific procedures and deadlines for filing an appeal, homeowners should review their local government's website.

Conclusion

Effectively managing your financial responsibilities as a homeowner involves understanding real estate taxes vs. property taxes. Real estate taxes, which apply to land and buildings, are generally higher and play a crucial role in funding local services like schools and emergency services. They also offer the advantage of federal tax deductions. In contrast, personal property taxes on items such as vehicles are typically lower but still significant. By grasping how these taxes are assessed and exploring available exemptions, you can ensure compliance with local regulations and avoid issues related to unpaid taxes. This knowledge not only helps in maintaining financial stability but also contributes to the well-being of your community.