If gaining a better understanding of all things financial in this next year is on your radar, then you may be doing a deep dive on where all of your dollars are going, including the dollars spent on your most expensive asset. Whether you are happily settled in your home or looking to purchase or sell a home in the coming year, it is wise to get a full grasp of all of the costs associated with homeownership.
One cost that can seem complex is the concept of property taxes. According to Investopedia, “Property tax is a tax paid on property owned by an individual or other legal entity, such as a corporation. Most commonly, property tax is a real estate ad-valorem tax, which can be considered a regressive tax. It is calculated by a local government where the property is located and paid by the owner of the property.”
So Why Do You Need to Pay Property Taxes?
There are three main ways we are taxed in this country: sales tax, income tax, and property tax. According to the Institute on Taxation and Economic Policy, property taxes are “rooted largely in the ‘benefits principle’ of taxation. Under this view, the property tax essentially functions as a user charge on residents for the benefits they receive from the local policies funded by property taxes. These policies benefit local residents directly in the form of better schools and fire protection, and indirectly in the form of increased housing values.”
The short answer: property taxes benefit you because they help to fund your local government that provides for the quality of roads and highways, services like schools and recycling, and safety services like fire, police, and EMS.
What Exactly Does This Mean for You, the Home Owner and How Is the Amount of Taxes Determined?
Simply put, property taxes are the taxes you are charged on the value of your home and land. The first part of the process is determining the value of your home. Most of the time this is done by estimating the property’s market value, or the amount the property would most likely sell for in the current real estate market.
In addition to determining your property’s market value, there is also another number that is important: your property’s assessed value. Most of the time this value is determined by using what is called an assessment ratio which ranges from zero to one hundred. While some states use a 100% ratio based on the property’s actual market value, some will assess the value at only a portion of the home’s actual value. Finally, the millage rate (the sum of several tax rates like municipal, city/county, or school district tax) is applied to the total amount of property tax collected.
But Wait! Aren’t There Tax Credits I Can Apply to My Property Tax Bill?
In some states, yes, property tax credits may offset the cost or the property tax bill. These may significantly reduce the total bill. And while most are usually received in the form of reimbursement on your income taxes, it is important to understand if you are eligible for any of these cost-saving benefits. The best place to get reliable information related to your state’s laws is by visiting the IRS.gov website.
A Final Word on Property Taxes…
For those who may be looking at retirement from military service or finding a “forever home” in which to settle, it is vital to fully understand the property tax implications before settling on a final destination. This list, ordered by greatest to least amounts of property tax by state, is a useful tool. For renters, you may suspect that you have effectively escaped having to pay property taxes, but in truth, often rental prices are increased and inflated to help relieve property owners of the burden of property taxes. This is an additional factor to keep in mind when you are deciding between a purchase and a rental.