US residential property tax

Property taxes are one of the few things you can count on in life, but a lot of people who have never owned a home don't know a lot about them. Because these taxes will be owed on a property you buy for as long as you own it, however, it's important to understand as much about them as possible.

Who Collects Property Taxes?

Property taxes are generally collected by the county, state and/or city you live in. While it can be common for all three of these entities to collect property tax, it is typical for the taxes to be combined together into one bill. The money collected goes to pay for a variety of services, but most places in the United States use the majority of their property tax income to pay for public schools. Because of this, a lot of people refer to property taxes as "school taxes".

How Much Will I Pay?

The amount of property tax paid varies from property to property. Each different taxing authority sets their own rates, making it impossible to simply guess the amount of tax a homeowner will pay without knowing several key pieces of information. In the vast majority of places, property taxes are based on a percentage of the overall value of the property. This rate is called the millage. Millage is the amount charged for each $1,000 worth of home value. For example, a home worth $100,000 in an area where the millage rate is $0.02 would pay $2,000 a year in taxes. The millage rate is decided by lawmakers each year.

While the millage rate is easy to figure out, determining the value of a residential piece of property can be a lot trickier. Most localities employ a property tax assessor who will determine the fair market value of a piece of property based on a variety of factors. This usually means looking at the size of a home, the number and type of external improvements, and the selling price of other homes in the viscinity. An assessor will not look at the interior of a home or other structure on the property when determining value. This is because they do not have the legal right to enter the property. This means that upgrades to flooring or new paint typically won't result in higher property taxes. Making changes such as adding an extra bedroom, however, requires a building permit that will trigger an increase in property taxes.

Even with this information, however, a lot of an assessor's job can be guesswork. Homes that have a lot of square footage but are not ideally located, for example, often trigger high assessments because the appraiser uses the higher home values of more ideally located properties that surround it. Often, larger municipalities will use computer-based systems to determine the value of homes in their area. These systems often fail to take into account factors such as properties that are located on the water are worth a lot more than those that are not. Because there can be some room for error, there are ways to appeal an assessment.

The other issue with assessments is that the value of a piece of property can fluctuate wildly in some areas. During the recent real estate bubble, for example, there were many homeowners who saw the value of their properties double or triple in just a few years. While this is great for people who want to sell, homeowners who want to remain in their homes want to keep their taxes as low as possible. In some areas that have frequent shifts in home value, such as Florida, there are laws in place to prevent sudden dramatic rises in property taxes. These laws typically control the rate at which property taxes can rise.

In addition to these laws, most localities have exemptions that allow people to take a deduction on their property taxes. This exemption typically negates a portion (the exact amount varies) of the assessed value of the property. For example, a person living in a home worth $100,000 in a locality with a $25,000 homeowner's exemption would only pay property tax on $75,000 of his or her home's value.

The most common deduction is called the homeowner's exemption. This exemption is typically given to people who occupy their homes (as opposed to landlords). It is meant to reduce the tax burden on residents who are (presumably) paying other taxes in the area, such as sales tax. Many localities also offer exemptions to veterans, disabled persons, the elderly, and other groups.

If you do not already retain the services of a tax consultant you can find a comprehensive list of local accountants here.

In partnership with Healthy Built Homes