Property taxes are determined by local governments and voters. The process can vary depending on the jurisdiction but, generally, these taxes are calculated based on the assessed value of the property and the local tax rate. The revenue generated from property taxes is used to fund local services and infrastructure, such as schools, police and fire departments, parks, and road maintenance.
Understanding how property taxes are determined is an important part of homeownership that allows you to effectively budget your property expenses. Let’s explore the key factors involved in determining real estate taxes.
assessed value
The assessed value of a property serves as the foundation for calculating property taxes. Local assessors evaluate the property and assign a value based on various factors, including the property's location, size, condition, and comparable sales in the area. It's important to note that the assessed value is often lower than the property's market value (the price your home could actually sell for) because, in many counties, it is calculated as a percentage of the market value. In addition, the assessed value does not fluctuate due to market conditions until the property is reassessed. Some states reappraise annually while others update property values every several years.
tax rates
Local governments set tax rates to generate revenue for providing public services and maintaining infrastructure. The tax rate is typically expressed as a percentage. For example, if the county appraiser deems that the value of a property is $200,000 and the local tax rate is 1.5%, the annual property tax would amount to $3,000 (200,000 x 0.015).
exemptions and deductions
Property tax regulations often include exemptions and deductions that can lower the assessed value or tax liability for certain property owners. These exemptions may be available for primary residences, senior citizens, veterans, or individuals with disabilities. Some jurisdictions also provide deductions for energy-efficient home improvements or conservation easements. It's essential to research and understand the exemptions and deductions specific to your location to potentially reduce your property tax burden.
arrears
Many areas charge property taxes semiannually and they are paid in arrears. This means that when your tax bill becomes due, you’re paying for the previous year’s taxes. For example, if you live in a county that pays in arrears, your tax bill in summer 2023 is actually covering the tax payment for the second half of 2022.
special assessments
This is a type of tax that is used to fund specific projects. For example, if the sidewalks in your neighborhood need to be repaired, your locality may add a special assessment onto the tax bills of the owners who benefit from the new sidewalks. Special assessments are not based on the value of the subject property, instead, they are determined based on the actual funding of the project.
impact on homeownership and real estate investments
Property taxes play a significant role in the affordability of homeownership and the financial viability of real estate investments. When budgeting for homeownership, it's important to consider property taxes alongside mortgage payments, insurance, and maintenance costs. For real estate investors, property taxes directly affect the potential return on investment and cash flow. Analyzing property tax rates and trends in an area can help investors make informed decisions about their investment strategies.
appealing taxes
If you find mistakes regarding your property on the county auditor site, such as incorrect square footage or lot size, or if you feel your assessed value is inconsistent with comparable homes in the area, you can appeal your property taxes. Your county auditor site should have information on how to begin the process. Note that you cannot appeal the tax rate, only the assessed value of your property. When protesting property taxes, it’s important to do your research and provide the assessor with documentation that verifies your claim.
While property taxes can be confusing, it’s important for homeowners to have some understanding on how they’re calculated in order to financially plan and recognize if there are mistakes with their real estate value. Make sure to view your property information on the county’s website and research the tax rates and exemptions of your locality. If you have questions or concerns, reach out to your trusted real estate professional for help!