Governments need money in order to operate, and much of that money is raised through taxes. You pay income tax on the money you earn, and you also pay it on property you own. Property taxes are levied by governments to help provide services such as water and sewer maintenance, law enforcement, fire protection and education.
What Is a Property Tax?
The property tax system in the United States dates back to 1796 when seven of 15 states chose to put a uniform tax on property. Although 12 of these states taxed livestock, only four taxed properties by valuation. That changed over the years until all municipalities, counties or states gradually adopted property tax policies.
Your municipal or county government puts a value on every parcel of property in its jurisdiction. This value is regularly assessed and adjusted upward or downward depending on various factors. This can change the amount of your tax. A professional assessor typically uses fair market value to determine what your property is worth. The assessor may be an elected official, depending on the jurisdiction.
What Property Is Taxed?
The assessed value of your property isn’t based on just the land it sits on. The assessment is also based on the fair market value of attached buildings on the property. This can include outbuildings like sheds and garages as well as your home.
Tangible personal property is also taxed to at least some degree in 43 states. 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 be assessed on cars, boats, RVs and even furniture.
Read more: How Long to Keep Property Tax Receipts
Taxes on Business Property
Businesses must also pay property taxes in many cases. It can vary depending on local laws, but the process is usually the same. The local property assessor places a value on any land or buildings that a business owns. Businesses also pay taxes on the furniture, equipment and supplies used to run their business in some states.
Some businesses receive property tax exemptions. Nonprofits like churches and charities are often exempt from paying property taxes provided that they meet certain requirements. An organization must file with the IRS to be granted nonprofit status to qualify.
Determining Property Tax Rates
The actual value you can get for your home 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.
The assessor will look at comparable sales in your neighborhood when using the sales evaluation rate. They'll compare your home's features, location, and condition to others that have sold in the area and base the assessment on what the most similar others have sold for. Overall market conditions and changes since the time of the others' sales is also taken into consideration. It can raise your assessment if you've made any improvements or renovations to your property, although assessors don’t usually consider or look at the interior of your home.
The cost method involves looking at what it would cost to replace your home. This can mean looking at how much an older home has depreciated and adjusting the cost downward. Depreciation would still be factored in with newer properties, as well as the cost of building materials and labor that would be involved if the building on the property had to be reconstructed.
How much would you be able to charge for rent based on current market conditions if you decided to rent out your home? This is the approach assessors take if they use the income method of evaluation. It factors in the cost of maintaining and managing the property, as well as the expense associated with insurance and taxes.
The assessed value is ultimately multiplied by the "mill levy" for the area to arrive at a tax rate. One mill equals one-tenth of one cent so you’ll pay $1 of every $1,000 of your property’s value in taxes.
Paying Your Property Tax Bill
A big part of the real estate closing process involves paying closing costs, and your initial property tax payments are often included in these costs. You'll typically be required to place 12 to 13 months of property taxes into an escrow account. Your mortgage lender will take care of paying your property taxes from that account going forward.
Your monthly mortgage payments will also include an ongoing charge for your property taxes. This money also goes into your escrow account. Your mortgage company will take a look at the assessed value of your home each year and reconcile your escrow account balance. You may receive either a payment or a bill at this time, depending on whether the funds in your account covered the amount you owed and if there was any surplus. Your mortgage bill can periodically increase or decrease based on the fluctuating assessed value of your home.
Property Taxes Without a Mortgage
Homeowners who pay cash for their properties or who pay off their mortgage loans are still responsible for paying property tax. Ideally, your local property assessor will send you a tax notice, along with payment instructions. But you should do your own research as to how taxes are handled in your area to be on the safe side.
For example, you can search for your property tax information by your address, last name parcel number or AFN number in Cuyahoga County, Ohio and find out what they are and when you owe them. You can pay your bill through the website when you've accessed that information.
Read more: Can I Pay My Property Taxes in Installments?
What Do Property Taxes Pay For?
How the money raised from property taxes is used can vary from one city or county to another. There are five local services that are typically funded, at least in part.
A solid education system is important to your local infrastructure regardless of whether you have school-aged children, and some of the money typically goes to this cause. State funds also go toward funding local public schools, but the traditional model is for property taxes to pay the bulk of the cost.
Police and medical technicians will show up quickly to take care of you in an emergency, and property taxes fund these services and local fire departments. They help cover the salaries, supplies and other costs related to public safety.
Roadways can quickly become riddled with potholes and uneven spots without routine maintenance. Property taxes help keep your streets smooth and drivable.
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.
Some parks, greenways and recreation facilities are also funded by property taxes, in whole or in part.
Tax Deductions for Property Taxes
Taxpayers can claim a deduction for property taxes on their annual tax returns under the header of “state and local taxes.” There’s a limit on this deduction. You can claim up to $10,000 a year, or $5,000 if you’re married and filing a separate return as of tax years 2021 and 2022.
Claiming a deduction for your property taxes means itemizing rather than claiming the standard deduction for your filing status, and you must file Schedule A with your tax return to do so. Sometimes the standard deduction is greater than the total of all your itemized deductions on Schedule A. Calculate your taxes both ways to see which option gives you the greatest tax benefit.
You can get the information from your local taxing authority if you don't know how much you paid in property taxes. You can only claim the taxes that were paid in the tax year for which you’re filing. Only the amount that was put toward property taxes will count if the money was taken from an escrow account by your mortgage company, because the escrow account might also hold reserves for homeowners' insurance.
Read more: Where Can I Find How Much I Paid in Property Taxes?
Property Taxes After a Home Sale
It’s rare that a home is sold on the very first or last day of the year, so you'll probably find that you must take over property taxes partway through the year. The buyer usually reimburses the seller at closing for the amount of property taxes the seller paid during the year while the property was in their ownership. This should be outlined in the contract and agreed upon by both parties.
The buyer would typically claim the deduction for taxes paid during the year, including any amount that was reimbursed to the seller for property taxes they paid. The seller can't claim property taxes for the sold home at tax time if they were reimbursed.
Nondeductible Property Taxes
There are some property tax expenses for which you can’t claim as a tax deduction. You can’t claim any portion that pays for services provided directly to your property, such as for tax collection, or flat fees that are charged by your local government, like a fine for not mowing your grass.
Any escrow refund that your mortgage company might send you must be subtracted from the total you enter on Schedule A.
Contesting the Assessed Value
Conduct thorough research. Carefully check the record card that’s on file at your local assessor’s office. Make sure your home description is accurate. Check the square footage, the number of bedrooms, acreage and any other details that could be running up the cost.
Look at the market. Your assessment should be in line with those of nearby homes of comparable size and with similar acreage and amenities, like an inground pool in the backyard.
You can 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 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, a military veteran or a disabled person.
Property taxes are inevitable if you own a home, but you can reduce their financial impact by claiming a tax deduction for your payments on your return. Just make sure it's worth your while taxwise, and that you're not better off claiming the year's standard deduction.
- EH.net: History of Property Taxes in the United States
- Moving.com: When Do You Start Paying Property Taxes on a New Home?
- Rate.com: Where Do My Property Taxes Go?
- IRS: Publication 530 (2020), Tax Information for Homeowners
- NOLO: Who Pays the Real Estate Taxes the Year You Buy Your Home?
- Kiplinger: 8 Steps to Appeal Your Property Tax Bill
- Tax Foundation: States Should Continue to Reform Taxes on Tangible Personal Property
- State of New Jersey Division of Taxation Property Administration: How Property Is Valued for Property Tax Purposes
- Tax Foundation: How to Calculate Property Tax Liability
- New Jersey Division of Taxation: Nonprofit Organizations and Government Entities
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.