Filing Your Income Taxes
Governments need money to operate, and that money is collected in the form of taxes. You pay tax on the money you earn, but you also pay it on the property you own. Property taxes are funds that you owe to the government to help provide services like water and sewer maintenance, law enforcement, fire protection and education.
What Is a Property Tax?
The property tax system in the United States dates all the way back to 1796, when seven of 15 states chose to put a uniform tax on property. Although 12 of the states taxed livestock, only four chose to tax property by valuation. That changed over the years until gradually, all cities and states adopted property tax policies.
Your tax bill isn’t arbitrary, though. Your municipal government puts a value on every acre of property under its jurisdiction. This value is regularly assessed and adjusted upward or downward, which changes the amount of tax you owe on that property. A professional assessor, who may be an elected official depending on jurisdiction, uses fair market value to determine what your property is worth.
What Property Is Taxed?
The assessed value of your property isn’t just based on the land itself. Your tax is also based on the fair market value of all attached buildings on the property. This can include outbuildings like sheds and garages in addition to your home.
In 43 states, tangible personal property is also taxed in some form or other. Delaware, Hawaii, Illinois, Iowa, New York, Ohio and Pennsylvania have no tax on tangible personal property, while Minnesota, New Hampshire, New Jersey, North Dakota and South Dakota only impose a personal property tax on select industries, such as public utilities. Personal property tax can include cars, boats, RVs and furniture.
Read More: How Long to Keep Property Tax Receipts
Taxes on Business Property
Homeowners aren’t the only ones who have to pay property tax. It also applies to businesses. This varies depending on local laws, but the process is the same. The local property assessor puts a value on any land or buildings a business owns. In some states, businesses also pay taxes on the furniture, equipment and supplies used to run their business.
There are some businesses that enjoy property tax exemptions. Nonprofits like churches and charities often don’t pay property taxes, as long as they meet certain requirements. To qualify for this, an organization must file with the IRS to be granted nonprofit status.
Determining Property Tax Rates
The actual value you can get for your house if you sell it may not be the same as the assessed value that determines your property tax rates. The assessor can use one of three methods to determine the fair market value of your home:
- Sales evaluation – For this method, the assessor looks at comparable sales in the area to arrive at a value. The evaluation looks at your property’s location, the condition of your property and the overall market conditions. If you’ve made improvements or renovations, the assessor will take that into account, as well, although assessors don’t usually look at the interior of your home.
- The cost method – This approach involves looking at what your home would cost to replace. For older homes, this can mean looking at how much it has depreciated and adjusting the cost downward. Newer properties would still factor in depreciation, but also the building materials and labor that would be involved if the building on the property needed to be reconstructed.
- The income method – If you rented your home, how much would you be able to charge based on current market conditions? That’s the approach assessors take if they use the income method. This method factors in the cost of maintaining and managing the property, as well as the expense associated with insurance and taxes.
Once the assessor has come up with a value, it’s multiplied by the mill levy for the area to arrive at a tax rate. One mill equals one-tenth of one cent, which means you’ll pay $1 of every $1,000 of your property’s value.
Paying Your Property Tax Bill
When you buy a home, a big part of the real estate closing process is paying those dreaded closing costs. Included in those costs is your initial property tax payments. Typically, you’ll put 12 to 13 months of closing costs into something called an escrow account. From that point forward, your mortgage company takes care of paying your property taxes, as well as your homeowners’ insurance, on your behalf.
After closing, your monthly mortgage payment includes an extra charge for your property tax and insurance. Each year, your mortgage company takes a look at the assessed value of your home and reconciles your escrow balance. You may receive a payment or a bill, depending on whether the funds in your escrow covered the amount you owed. Your mortgage bill can periodically increase or decrease based on the fluctuating value of your home.
Property Taxes Without a Mortgage
What happens if you don’t have a mortgage? Homeowners who pay cash or pay off their home are still responsible for both property tax and homeowner’s insurance. Insurance is fairly easy – you simply ask your insurer to start billing you for the amount. But for property tax, it gets a little more complicated.
Ideally, your local property assessor sends a tax notice to you in the mail, along with payment instructions. But to be safe, you should research how taxes are handled in your area. In Cuyahoga County, Ohio, for instance, you can search for your property tax information by your address, last name parcel number or AFN number and find out what and when you owe. Once you’ve uncovered the information, you can pay your bill through the website.
Read More: Can I Pay My Property Taxes in Installments?
What Does Property Tax Fund?
Just as different municipalities tax property differently, how the money is used can vary from one city to another. There are five local services that are typically funded, at least in part, by property taxes:
- Public schools – Whether you have school-aged children or not, a solid education system is important to your local infrastructure. Although state funds also go toward local public schools, the traditional model has been for property taxes to pay for the bulk of the cost.
- Safety – If you have an emergency, you’ll need local fire, police or emergency medical technicians to show up quickly and take care of you. Property taxes help cover the salaries, supplies and other costs related to public safety.
- Streets – Without routine maintenance, roadways can quickly become riddled with potholes and uneven spots. Property taxes help keep your streets smooth and drivable.
- Sanitation – Cleaning up is also an important part of maintaining your community. Your property taxes pay for services like trash collection, storm-water management and street cleaning.
- Public spaces – Some parks, greenways and recreation facilities are funded, in part or whole, by property taxes.
Tax Deductions for Property Taxes
If you pay property taxes, there is a little good news. Taxpayers can claim property taxes in their annual income tax filing under the header of “state and local taxes.” There’s a limit on this deduction, and it can change each year, but currently you can claim up to $10,000, or $5,000 if you’re filing separately.
To deduct your property taxes, you use Schedule A to help you figure your deduction. Sometimes the standard deduction is higher than what you get by itemizing, but you can save money by calculating it both ways and seeing which gives you the biggest benefit.
If you don’t know how much you paid in property taxes, you can get the information from your local taxing authority. It’s important that you only claim the taxes that were paid within the tax year in which you’re currently filing. That means if the money was taken out and put in an escrow account by your mortgage company, only the amount that was put toward property taxes will count.
Read More: Where Can I Find How Much I Paid in Property Taxes?
Property Taxes After Home Sale
Things can get a little tricky for property owners if you move during the year. Since it’s very rare that a home is sold on the very first or last day of the year, chances are you’ll have to deal with taking over property taxes partway through the year. At the closing, the buyer usually reimburses the seller for the amount of property taxes the seller has paid during the year prior to the closing. But this will be outlined in the contract and agreed upon by both parties.
It's important, at tax time, that each party claim only the amount of taxes actually paid during the tax year. So in the case of a home-sale split, the buyer claims the taxes paid during the year, including any amount that was paid to the seller for property taxes already paid. If the seller was reimbursed, that seller cannot claim any property taxes for the sold home at tax time.
Nondeductible Property Taxes
There are some property tax expenses you can’t claim as a tax deduction. You can’t claim charges for services, including:
- Fees for services provided to your property
- Periodic charges for services, such as a quarterly charge for tax collection
- Flat fees charged by your local government, like a fine for not mowing your grass
If you were issued a refund of part of your real estate taxes, you need to deduct that amount from the property taxes you’re claiming at tax time. So the escrow refund your mortgage company sent you needs to be taken off the total you input onto your Schedule A.
Contesting the Assessed Value
In some cases, your property taxes may be higher than you think they should be. The property assessor likely won’t let you know the specifics of the home value that was placed on your property, but you're probably paying close attention to the local market.
If you suspect that your property’s assessed value is in error, here are the steps you should take:
- Conduct thorough research. This means carefully checking the record card that’s on file at your local assessor’s office. Make sure your home description is accurate. Check the square footage, number of bedrooms, acreage and any other details that could be running up the cost.
- Look at the nearby market. Your assessment should be in line with the assessments of nearby homes of comparable size and with similar acreage.
- Request an appeal. Most local authorities have a process in place for appealing your tax assessment. Make sure you’ve gathered any documentation and submit all of the information for review. Also check to make sure you aren’t missing out on any credits you’re entitled to based on your status as a senior citizen, military veteran or disabled person.
If you own a home, property taxes are inevitable. However, you can reduce the financial impact by claiming your payments on your taxes. Closely monitor the assessed values in your area to ensure you’re prepared for a sudden increase in your monthly mortgage payment due to a sharp increase in your property tax rates.
- Investopedia: Property Tax
- EH.net: History of Property Taxes in the United States
- Tax Foundation: States Should Continue to Reform Taxes on Tangible Personal Property
- Fundera: Business Property Tax: The Ultimate Guide
- Investopedia: Do Nonprofit Organizations Pay Taxes?
- NerdWallet: How Home Improvements Can Increase Your Property Taxes
- Moving.com: When Do You Start Paying Property Taxes on a New Home?
- Rate.com: Where Do My Property Taxes Go?
- IRS: Publication 530 (2019), Tax Information for Homeowners
- NerdWallet: Property Tax Deduction Rules and How You Can Save More
- NOLO: Who Pays the Real Estate Taxes the Year You Buy Your Home?
- Kiplinger: 8 Steps to Appeal Your Property Tax Bill
- U.S. Census Bureau. "Local Governments in Northeast More Reliant on Property Taxes than South and West." Accessed Nov. 26, 2019.
- Organisation for Economic Co-operation and Development. "Tax on Property." Accessed Nov. 26, 2019.
- Internal Revenue Service. "1.14.4 Personal Property Management." Accessed Nov. 26, 2019.
- Tax Foundation. "States Should Continue to Reform Taxes on Tangible Personal Property." Accessed Dec. 18, 2019.
- Tax Foundation. "Testimony before the House Ways and Means Select Revenue Measures Subcommittee." Accessed Dec. 18, 2019.
- Internal Revenue Service. "With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds." Accessed Dec. 18, 2019.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.