Property Taxes 101

“In this world, nothing can be said to be certain, except death and taxes.” – Benjamin Franklin.

Ah. Nothing seems to conjure up dread more than the word taxes. Whether it’s personal income tax or property taxes, everyone has an aversion, don’t you agree? But as a homeowner, it’s important to understand how property taxes work. So become an informed homeowner today with Property Taxes 101.

Property Taxes Defined

Essentially, property tax is a levy by your local government that’s applied to any real property that you own. Real property is a legal term referring to physical property, such as your home, land, and fixed structures. In some states, property taxes can include both real property and tangible personal property, such as boats or cars.

Who Pays Property Taxes?

While the rate varies by state, everyone who owns real property is subject to property tax. This includes homeowners (like a primary residence, rental property, second home, etc.), businesses, and other entities that own real estate. A flat tax rate applies regardless of the taxpayer’s income level. Renters of such properties are not subject to property taxes.

What Do Property Taxes Pay For?

Property taxes are used to fund public services and amenities in your municipality, such as schools, roads, libraries, parks, pools, public transportation, water/sewer, as well as for police and fire protection.

How Are Property Taxes Calculated?

Property taxes are based on:

  1. The assessed value of your property. This is determined by your home size, recent sales in the neighborhood, and current real estate trends. The value of your property directly impacts your property bill, so the higher the value of your home and land, the more you’ll pay in property taxes.
  2. Exemptions may reduce what you owe. The good news is that many Americans are eligible for property tax exemptions, such as a homestead exemption, or for seniors, veterans, or those with disabilities.
  3. Local property tax rate. Property tax rates vary by location. To determine your specific rate, contact your local tax authority or search online for the rate using your property address.

Can a Property Tax Assessment Be Appealed?

All homeowners have the right to appeal their property tax assessment if they believe it’s inaccurate. However, it’s crucial to file the appeal before receiving the property tax bill. Once the bill is issued, the opportunity to appeal is typically lost.

Are Property Taxes Tax-Deductible?

You can generally deduct property taxes on your federal income tax return if you itemize your deductions instead of taking the standard deduction. This also applies to mortgage interest, medical expenses, and charitable donations.

When Are Property Taxes Due?

Property tax payment schedules vary by location, and range from monthly to annual or semi-annual installments.

What’s the Process for Paying Property Taxes?

Property taxes are typically paid yearly, but many homeowners include them in their monthly mortgage payments. The lender holds these funds in escrow and pays the annual tax bill on the homeowner’s behalf, so you won’t need to track when taxes are due. The escrow amount is estimated based on previous taxes so any surplus is carried over to the next year, while a shortfall may require an additional payment when property taxes are due.

What Happens If You Don’t Pay Property Taxes?

Several scenarios could play out if you don’t pay your property taxes.

  • The lender could place a lien on your property. When you sell the property, the lender will be paid out first for any back taxes and penalties applied, before you see any remaining proceeds
  • If there’s severe non-payment of taxes, your municipality could initiate foreclosure proceedings, meaning your property will be sold to recover unpaid taxes
  • The local government could also opt for legal action against the homeowner to get those unpaid taxes, which could result in penalties, fines, and potential legal fees
  • Unpaid property taxes can negatively impact a homeowner’s credit score, which directly affects the ability to obtain a future loan or line of credit

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Author – Connie Motz