Being taxed, unfortunately, is about as American as apple pie. From federal and state income tax, payroll tax, sales tax, gift tax, estate tax, and others, it may be difficult to determine where the money is going and what purpose it serves. Property tax, while yet another tax, is one that hits close to home (literally), but because the tax revenue serves local purposes it may make paying the tax an easier pill to swallow.
Here are a few things to know about property tax.
What is Property Tax?
Once you are ready to buy a home you will quickly become familiar with property tax – a tax imposed upon real estate and personal property. In fact, when you receive a Good Faith Estimate when applying for a loan, you will notice a breakdown of the money you will owe when you make your mortgage payment. Aside from the principal and interest charge, a portion of money will most likely be collected by your mortgage lender each month and withheld in an escrow account. This amount is broken down into property tax and home insurance and will be paid when the money is due.
While the amount you owe for property tax can be unnerving, the real shock may come when you realize that as long as you own a home, or any other land or buildings, your obligation to pay tax on that property never goes away. Even after paying off your home, condo, or land, paying tax on those properties will always be your responsibility. Once you own your home, you will be directly responsible for making those payments to your local tax office.
What is Property Tax Used For?
Knowing what your property tax is used for may take the sting out of paying yet another tax. This money, while enforced by the government, is used to pay for important services in your community. People are usually happy to pay for the services of local fire protection and law enforcement, and to help fund local schools and libraries. There are also many other items and services that are paid for by property taxes. Paving and maintaining city roads, the construction and upkeep of parks and other public lands not owned by the state, public transportation, snow removal and sanitation services are mostly funded through property tax. Depending on their quality and service, all these things can have a positive impact on the value of your personal property.
How is Property Tax Determined?
The amount you owe for property tax is determined by the assessment of your property and the current tax rate. While we may hope for our homes to be appraised at the highest value possible when the time comes to sell our property, we may feel otherwise when it’s time for our periodic property tax assessment. Your state or local law determines the frequency of your property assessment. In some jurisdictions property value will be assessed every year, but in other areas, assessment happens only every five years. This assessment may vary from year to year depending on the changing market and the property values in your area. It is often determined by comparables (comps), or homes with similar value to yours, that have sold in the recent past. To get an idea of what to expect from a home’s value, check out our future value of real estate calculator.
As clear cut as property tax might seem, there are other factors that could change what you owe in property tax. For example, many homeowners will qualify for certain exemptions that will apply toward their assessment and lessen the amount they will owe for property tax. Exemptions can be dependent on the state you live in and your life situation, and they can make your property tax less of a burden. However, you might find your property tax rising even when properties around you are losing their value. If this is the case, you may want to appeal your assessment. The proper steps for an appeal should be printed on your assessment notice.
While property taxes are important to keep a community safe, functional and appealing to its residents and visitors, you should not be taxed more than needed. Keeping a close eye on your assessment and your local property tax rate will keep you on track with your monthly budget, and help you be an informed taxpayer.