How to Calculate Property Tax & Common Tax Questions

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Learning how to calculate property taxes is an intimidating endeavor, but nonetheless an important one. However, fortune will favor those who are able to accurately identify each and every one of their expenses. It’s only once investors are able to account for every expense that budgeting starts to make sense. Likewise, you can’t possibly know how much home you can afford if you don’t take every expense into consideration. The ability to calculate property taxes isn’t only important, but also essential when coming up with a budget or amortizing mortgage payments.

If you want your budget to reflect an accurate representation of what you can afford, you need to know how to calculate property taxes, and this guide should help you get the ball rolling.

What Are Property Taxes?

Property taxes are taxes levied specifically on physical real estate, and they are based on the value of the property as well as the land it sits on top of. It is worth noting, however, that property tax isn’t universal—far from it, in fact. Instead of being federally regulated, as many falsely assume, property tax is actually assessed by local or municipal governments, and can vary dramatically from region to region. Local governments, not unlike the county in which the property resides, propose the tax by evaluating the value of the property.

Property tax is compulsory, meaning it’s required by law. Homeowners are required to pay property tax each year. The rate they are expected to pay, however, is dependent on their particular local government and the value of their asset.

Local municipalities are inclined to levy property taxes on homeowners for one simple reason: to generate money for public services. It is not uncommon for municipalities to use the proceeds from property taxes to address road repairs, building new schools, snow removal, fire protection, garbage pick-up and other similar services. Simply put, property taxes make it possible for governments to improve and maintain local infrastructure.


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How Is Property Tax Calculated?

Property taxes are assessed differently from state to state, and even from municipality to municipality. It is not uncommon for even neighboring cities to assess their property tax rates differently. There is, however, a general guideline for calculating property taxes that could give you a better idea of what to expect; it’s not perfect, but it’s generally accepted by those looking for a “ballpark” estimate:

  1. Find the assessed value of the subject property.

  2. Be sure to add the value of the land and any subsequent improvements to determine the true value.

  3. Locate and talk to the area’s tax assessor to learn the local tax rate.

  4. Account for any additional taxes levied by subsequent local agencies.

  5. Add up all of the taxes from steps three and four.

  6. Multiply all the taxes you are aware of by the property value (again, accounting for the land and improvements).

In order to calculate your annual property tax rate, there’s one thing you must do before anything else: determine the current fair market value of your home. That said, homeowners are better off listening to what their tax assessors have to say. While you may have an idea of how much your home is worth, it’s the tax assessor’s assessment value that you need to calculate the amount you will pay in property taxes.

To be clear, homes have already been assessed by a tax assessor, but I digress. Tax assessments take place “every time a property is sold, bought, built, or renovated by examining the permits and paperwork filed with the local municipality,” according to Realtor.com. However, to accurately calculate your property tax obligation, the assessment needs to be of the home’s current value. With any luck, a proper assessment may already be made available on your municipality’s website, or by calling your tax assessor personally.

Once you are confident you have your home’s assessed value, you will need to determine another number: the mill levy. Otherwise known as the tax rate for your particular area, a mill levy will also vary from city to city, so be sure to get the correct information. As it turns out, mill levies will often reflect an area’s amenities. A luxurious neighborhood with nice roads and schools, for example, will most likely have a larger mill levy. What’s more, the mill levy can be found on your local tax assessor’s website; they are often represented as a percentage.

Once you have both of the numbers you need, simply multiply your home’s assessed value by the mill levy. The resulting number will be the amount of property taxes you are expected to pay each year.

How Long Do You Have To Pay Property Taxes?

The amount of time you have to pay property taxes depends on the tax collection schedule of your local government. Many homeowners will find that their lender rolls property taxes into their mortgage payments. In this case, property taxes would be paid on a monthly basis. In other cases, property tax collection schedules vary from state to state. Most often, property taxes are billed annually, but the length of time you are given to pay these taxes vary. For example, some states may provide the option to split up payments into a few installments. However, delinquency or penalty fees can be assessed if payments are late for up to a certain amount of days after the final installment due date.

Can You Deduct Property Taxes?

Property taxes are traditionally deductible, but the Tax Cuts and Jobs Act of 2017 have limited some of the deductions to be made. The recent tax reforms may have left you wondering how you will be affected, but some of these changes and how they will affect property tax deductions in next year’s filings remains unclear. According to H&R Block, state and local income taxes can still be deducted, but there will be a combined total limit of $10,000, which encompasses sales tax and real property taxes. Homeowners should always consult a tax professional.

Are Property Taxes Included In Mortgage Payments?

Property taxes are oftentimes included in mortgage payments. Lenders will often roll property taxes into monthly mortgage payments, in order to protect themselves. If the homeowner fails to make their mortgage payments, and thus the property tax, the lender has the ability to foreclose upon the property. This way, lenders are able to protect themselves against any delinquencies.

Property Tax Calculator

Again, there is no universal equation for calculating property taxes that will give you the exact amount you can expect to pay each year. The variance between state to state and even city to city is too great. Each region will have its own tax rate to deal with. However, SmartAsset happens to have a property tax calculator that can make things a little easier, or at least give you a good approximation.

Summary

Learning how to calculate property taxes may not sound like a lot of fun, but I can assure you the ability to do so will come in handy when you are trying to either investing a property or buy a home to live in. At the very least, properly calculating your tax obligations each year will help you pinpoint expenses and make budgeting a lot easier. Hopefully this guide will give you the confidence to make some calculations of your own, but as always, be sure to consult a tax professional. This information pertaining to property taxes is intended to provide generalized financial information for a broad audience; it is not a substitute for personalized tax, investment, legal, or other business and professional advice. Always seek out the assistance of a tax professional who is well-versed in the real estate industry before coming to any conclusions about calculating property taxes.

Have you ever wondered what to expect from property taxes before buying a home? Let us know how property taxes have influenced your own buying decisions in the comments below:

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Real Estate Investing Strategies
Real Estate Investing Strategies
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Real Estate Investing Strategies
Real Estate Investing Strategies
Real Estate Investing Strategies