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What Is Property Tax? 5 Things to Know



Property taxes are yet another expense that potential homebuyers need to consider when looking for a new home. Lenders often roll these costs into the monthly mortgage bill which can lead to sticker shock for the unprepared, but these taxes are levied even after you’ve paid off the mortgage and own your home outright. And since property taxes are tied to the value of your property, they’re an expense that can go up or down from year to year and make it difficult to budget for the true cost of homeownership.

Understanding why property taxes are collected, how they’re assessed, and how to pay them is important for current and prospective homeowners. It’s also useful to know that it’s possible to permanently lower one’s property tax or to be exempt from it entirely.

Why Property Taxes Are Collected

Property taxes are paid directly to local governments to pay for important community services such as public libraries and schools, police and fire services, and the roads you drive on every day. Homeowners may also have to pay special or direct assessments — flat taxes often earmarked for recurring local services, such as park maintenance or street cleaning. Sometimes these taxes are only temporary if they’re being collected for the construction of a new public school or library.

That said, property taxes are inevitable. They’re levied every year — even if you’ve paid off your mortgage. As long as you’re the lawful owner of the property, you’ll have to pay your share of property taxes to the local government.

The good news is you can deduct your property taxes on your federal income tax return, but only the portion based on your property value, not the special assessments. There’s even a way to permanently reduce property taxes, which we’ll get to later.

How Property Taxes Are Assessed

Property tax is determined by the local government which appraises the value of the property. This is the most important step as every subsequent calculation is based on that number.

Next, the government will apply the local mill rate. A mill rate is the amount of money due for every $1,000 of your property’s assessed value. For example, if the mill rate is 5 and your property is worth $200,000, you’ll pay $1,000.

(Mill Rate x Assessed Property Value) / 1,000 = Property Tax Amount 

Because property taxes are based on the assessed value of your home, they can increase or decrease as the housing market changes. Property taxes might be reasonable when you first buy your home, but if you renovated your house you’d probably increase its market value and therefore, see an increase in your property tax bill too.

Always research local property taxes before you buy a home so you aren’t surprised when you receive the first mortgage payment or if property value rises substantially a few years into ownership.

How to Permanently Reduced Your Property Tax Bill

Experts estimate that millions of U.S. homes may be overassessed. If you believe your home’s assessed value is too high, you can appeal the assessment to potentially get your property taxes reduced.

To appeal your property tax assessment, you’ll need to show why you believe your home is overassessed. For example, the local government may have inaccurate information about your home with records saying you have an in-ground pool or a fourth bedroom that doesn’t exist. Homeowners can further strengthen their case by looking for comparable properties in the area that are valued significantly lower than the home.

Most appeals can be filed via an online form or through the mail. However, you may have to attend an in-person hearing if your appeal isn’t approved. At the hearing, you’ll argue your side of the case and present your evidence: comparable, low-value properties or photos of your home that show the government has inaccurate information. An official from the local tax assessor’s office may be present to defend the tax office’s assessment of your home.

Taking on the local government may seem like a big job, but there’s very little downside to appealing your property tax assessment. It can save you money, just like using a discount real estate broker or an agent-matching service that connects customers to full-service agents who work for a fraction of the traditional cost.

The worst-case scenario is that your appeal is denied, and your property taxes stay the same. The only real cost is your time and any non-refundable fees you may have to pay to file your appeal.

You May Be Eligible for a Property Tax Exemption

Many jurisdictions offer property tax exemptions for various groups, including military veterans, senior citizens, and residents who’ve lived in a home for a certain amount of time. Some municipalities also offer homestead exemptions, which exempt a portion of home value from taxes. Contact your local tax assessor’s office to find out if you qualify for an exemption.

How to Pay Property Taxes

Due dates for property taxes vary widely between counties. In some cities, it’s paid in an annual bill in one lump sum. In others, property taxes are paid in installments. As for putting the money in the hands of the local government, there are two primary ways that they’re paid.

If you have a mortgage, it’s likely that part of your monthly payment is set aside in an escrow account specifically to be used for property taxes. The lender uses the money in that escrow account to pay your property taxes when the bill is due. If you have questions, it doesn’t hurt to ask your mortgage lender to make sure your property taxes are paid on time and in full.

If you don’t have a mortgage with property taxes in escrow, then you’ll have to pay the taxes out of pocket. One option is to send a check to your local tax office. The only extra costs are the envelope and postage stamp. The second method is to pay online through your local tax assessor’s website. If you opt for an online payment, you’ll likely have to pay a convenience or processing fee. Many counties will also add an additional, percentage-based fee if you use a credit card. This can add hundreds or even thousands of dollars to your property tax bill and is advised against if it can be avoided.

Failure to Pay Property Taxes Can Have Dire Consequences

Failing to pay property taxes on time can have serious consequences and could cause you to lose your home. Missing a due date may incur penalty charges and interest. If you still fail to pay after a year, a tax lien may be placed on your house. If you sell your home, proceeds will repay the lien before you receive your cut. If your property taxes are delinquent for long enough, your home may be foreclosed and auctioned to pay your tax bill.

If you are struggling with debt that’s preventing you from being able to pay your property tax, talk to a debt expert for free today.

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