November 1, 2023
What Are Property Taxes?
A property tax is charged on certain types of physical property, such as a home or land, by the local government. For example, if you own a home, you may be charged property tax by a taxing district such as a county and/or city. The income collected from these taxes is often used to help fund schools, infrastructure, police and fire departments, and other services. Locations with higher property taxes typically offer more amenities than those with lower property taxes. It is helpful to keep this in mind when you are seeking to buy a home.
How Property Taxes Are Calculated
There is not a set property tax rate in the United States. Rather, it varies by location. Local governments will typically hire a tax assessor to determine the value of the properties in their jurisdiction based on fair market values or the recent sale prices of comparable homes in the area. The value this individual determines is then multiplied by the property tax rate in that municipality. It is common for property value assessments to be updated annually, every five years, or somewhere in between.
The frequency in which property taxes are due depends on the location. The pay period could be monthly, quarterly, semi-annually, or annually. It is also common for homeowners to pay extra to their mortgage provider each month to pay property taxes on their behalf. In these instances, the mortgage company keeps the money in escrow until the tax bill is due.
Property Tax vs. Real Estate Tax
The terms property tax and real estate tax are often used interchangeably, but there is a distinction between the two. A real estate tax is a property tax, but the same is not always true the other way around. A property tax can also include taxes on tangible personal property such as cars, boats, etc. On the other hand, a real estate tax only applies to real property, which includes land and buildings.
Common Property Tax Exemptions
Many individuals are eligible for property tax exemptions and may be unaware they meet the qualifications. Four of the most common property tax exemptions apply to homestead, persons with disabilities, senior citizens, and veterans/disabled veterans.
- Homestead: Can protect surviving spouses from creditors and help lower the amount due in property taxes after a homeowner passes away but can only be applied to a primary residence.
- Persons with disabilities: Qualified individuals with disabilities can reduce the amount they owe in property taxes.
- Senior citizens: In qualifying locations, senior citizens can lower the amount they pay in property taxes, but typically only applies to a primary residence.
- Veterans/disabled veterans: Veterans and disabled veterans often qualify for tax exemptions from the state, county, and city.
What Happens if You Fail to Pay Property Taxes?
Failing to pay property taxes could result in the local government or taxing authority placing a tax lien on the property. When this occurs, a legal claim is made against the property or financial assets of the property owner. As a result, the taxing authority will be entitled to a portion or all the proceeds when the property is sold. As a buyer or seller, it is important to ensure there are no tax liens on a property before agreeing to buy or sell it. Conducting a title search is one of the easiest ways to discover if a property has a tax lien.