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Buying a home comes with its fair share of expenses, including closing costs, homeowner’s insurance, and higher utility bills. While preparing for these expenses, it is also essential to understand property tax calculations- an integral part of homeownership.
Understanding property taxes is one of the most confusing challenges for many homeowners. While you do not have to calculate property taxes yourself as they are charged automatically by the local government, your tax assessor’s office may get your bill wrong. Consequently, you may end up paying a fee much higher than the actual value of your property.
Accordingly, it is crucial to understand how to calculate property taxes to ensure you do not get overcharged and avoid any unwanted surprises in terms of a huge unexpected amount.
What Are Property Taxes?
Property taxes are levied based on the value of a property collected by municipal governments. Apart from being one of the significant ongoing expenses for homeowners, property taxes serve as a major source of revenue for local governments. They are used to fund services like school, fire services, transportation, emergency, parks, recreation, libraries, and more.
Paying Property Taxes
As a home, land, or real estate owner, you owe property taxes to the government. That is even after you have paid off the total mortgage. They are an ongoing expense that generally increases over time as the property’s value appreciates. Consequently, you can not avoid property taxes. That makes it imperative to pay attention to your local tax rates and assessed value before leaping into homeownership.
While property taxes are necessary for state and local governments to function and provide services to residents, they can be a burdensome expense for many homeowners. As suggested by Texas property tax loan pros, a property loan can help you pay your dues on time and avoid late penalties and fees. Although rare, if you fail to pay your taxes for too long, you may risk losing your property altogether.
Calculating Property Taxes
If you are ready to buy a home, then it is essential to know how property taxes are calculated in the tax assessor’s office rather than just making the payment when due. To help you better comprehend property taxes, let us take a closer look at the crucial aspects that determine how much tax you are liable to pay on your property.
Property’s Assessed Value
The market value of your property will serve as the starting point to calculate your property tax bill. Local governments hire a tax assessor to assess the properties in a tax jurisdiction. Depending upon the area, the tax assessors may carry out assessments every once to every five years.
It is important to note that the assessed property value is not always the same as its purchase price and could be lower. The market value of a property plays a central role in your property tax bill.
The assessor will determine the value by determining key attributes of the property, such as its size and amenities. They will compare the property with the sales price of other similar properties, or comps, in the area. They will also factor in the value of any recent upgrades and the income potential if rented out.
After determining the assessment value, the tax assessor will deduct any tax exemptions for which you may qualify. Some common tax exemptions include properties owned by persons with disabilities, senior citizens, or veterans.
Assessment Ratio
The assessment rate refers to the ratio of the assessed value of a property to its market value. That is a set percentage every tax district uses to determine the taxable value of a property.
Assessment ratios and tax rates vary across jurisdictions. Some states assess property at 100 percent of the market value, while others at less than market value. The higher the ratio, the higher the corresponding tax bill.
Taxable Value
By multiplying the assessed value with the local assessment percentage, you get the taxable value of your property. For example, if the assessed value of your property is $300,000 and the assessment percentage is 80%, the taxable value would equate to $240 000.
You may contact your tax assessor office to find out the property’s tax rate or search online by state, county, and ZIP code.
Mill Rate
The mill rate or millage rate is the tax rate as set by the government. It refers to the amount of tax levied per $1000 of the assessed value of property payable in taxes. The tax assessor’s office multiplies your taxable value by the mill rate to calculate your tax bill.
Mill rates are usually stated in terms of the number of mills and not as a percentage. In property tax terms, one mill is equal to $1.00 in tax for every $1000 of the taxable value.
Different states have their millage rates. If your local rate is 20 mills, you would pay roughly $20 in taxes per $1,000 of the taxable value.
Do the Math
Once you know your assessed value and your mill levy, determining your property tax is pretty simple. All you have to do is multiply the assessed value of your home by the applicable mill rate. That would present you with a rough estimate of the amount in taxes you should expect to pay each year.
So if you own a property with a taxable value worth $240 000 and the local millage rate is 20, multiply the property’s value by 2% to arrive at your annual tax bill of $4800.
Lowering Your Tax Bill
If you are doubtful that you are taxed inaccurately, you may contest the tax bill by challenging your home’s assessed valuation. You will have to show that the assessed value is not a true reflection of the property’s actual value. If successful, your appeal could cut your property tax bill.
Contact your local tax office. If unsatisfied, take up the matter with an independent tax appeals board.
Property taxes vary widely across regions. Several factors affect your tax bills, like the property’s size, age, and type (residential, commercial, office, etc.). The amount of property tax you are liable to pay also depends on the value of the property. That is mainly dependent on its size and location. Typically, areas with high property taxes also have great amenities like schools, good infrastructure, entertainment facilities, and more.
Therefore, when you plan to buy a new home, property taxes must be a key consideration in your ultimate decision.