Property taxes can be confusing, especially if you’re new to owning your own home. You might have questions about what they are and how they’re assessed, or you might simply be curious about how property taxes work overall in your area. To find out more about property taxes and tax assessment, keep reading!
1) The Basics
A tax on real estate is paid on a property that is owned by an individual or another legal entity, such as a corporation. Property tax is usually a real estate ad-valorem tax, which can be considered a regressive tax. A local government determines the amount of tax to be paid by the owner of the property, typically using the value of the property plus a small amount for land. However, some jurisdictions also tax tangible personal property like cars and boats.
Taxes on property cover various types of property, though they are most commonly levied on land (i.e., real estate). Municipalities collect taxes on property more often than any other taxing authority. Taxes help local governments finance local services that individuals cannot generally acquire on their own (e.g., police and fire protection).
The taxes will be used by the local governing body to fund water, and sewer improvements, law enforcement, fire protection, and education and these are the services that will benefit the community. They are not deeds of reconveyance.
2) Property Tax Assessment
When determining the amount of tax due on a property, a tax assessor determines the assessed value of the property and does this by considering the value of the property as calculated by government assessors. Despite your type of home, you can expect to pay property taxes.
When you are making your mortgage payment, it is likely that you are already paying your taxes. This is because mortgage lenders often estimate your annual taxes in advance and bundle them into your monthly payment. In these circumstances, an escrow account is created to save funds on monthly bills and deposit them at due time, without homeowners having to take further action. A tax assessment may help you foresee how escrow payments are going to rise or fall in the near future.
Property taxes are assessed using three main approaches: the cost approach, the sales comparison approach, and the income approach (it is important to note that appraisals and assessments may result in different property values).
- Cost Approach: The value of any home or other building on the land, any equipment (e.g. a pool), the natural landscape (e.g. wildlife), and so on are summed, while any age-related depreciation on the home and other structures is subtracted.
- Sale Comparison Approach – based on the average of similar houses in the area.
- Income Approach – To assess income properties (such as rentals), capitalization is used.
3) Exemptions May Be Available
Some properties are exempt from paying property taxes, such as those belonging to non-profit, religious, or governmental institutions. Retirees, veterans, and others eligible for STAR can also apply for exemptions. The process for exemptions for these groups typically requires submitting an application.
The specific exemptions you qualify for depend on your financial situation, home state, and even local municipality.
Homestead exemptions reduce a household’s taxes by protecting a certain amount of their home’s value from taxation. These exemptions are considered progressive because they provide the greatest relief to the people who need it most.
4) You May Qualify For Deductions
Property taxes can be a financial burden for homeowners, but they can be written off on tax returns.
In addition to state and local taxes, homeowners can deduct tax on property from their federal income taxes. You might have paid closing taxes on your property purchase or sale as well as your annual property tax on its assessed value.
You cannot deduct certain tax deductions, such as those related to renovations or taxes listed on your bill, such as trash collection fees.
5) If You Don’t Pay Property Taxes, You May Incur Penalties
If you don’t pay your taxes, you may end up having to pay penalties. Depending on the state in which you live, these penalties can be pretty steep. In some cases, you may even end up losing your home. That being said, always paying your property taxes in full and on time is important. That way, you’re able to avoid late penalties and interest payments.
Final Thoughts: Why You Need A Good Tax Professional
No one likes paying taxes, but they are necessary for owning a home or investment property. A good tax professional can help you minimize your tax liability and maximize your deductions. They also keep up with the changing rules that go into effect every year. The best way to find a reputable tax accountant is by word-of-mouth; ask friends and family for recommendations. Find out if they have experience in the area of taxes relevant to your situation. A qualified tax professional will be able to answer any questions you may have regarding your personal financial situation and ensure that you get all the benefits available to you. You might also consider a real estate attorney to help with any property tax troubles or questions.