What's in this article?
A not-so-hidden expense that comes with home ownership is property tax
Based on the assessed value of the home, this amount varies from state to state, community, and school district. And although exceptions exist, property tax never goes away.
It’s just one of the many things to keep in mind when preparing yourself to buy a home
Let’s look at just five of the many things to know about property taxes.
What is property tax?
Property tax is what all homeowners pay to state and local governments.
It is the single largest source of state and local revenue in the U.S., according to the Tax Foundation, an independent non-profit tax policy foundation.
Accounting for more than 30% of total state and local tax collections and more than 70% of total local tax collections, property taxes help fund schools, roads, police, and other services in your area.
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How is the property tax rate determined?
The local tax assessor will apply a value to your property.
This is different and will most likely be lower than the number the appraiser gave the home during the buying process. The appraiser is often hired by the lender to determine the current value of a property. The tax assessor works for the government.
Some jurisdictions use market value for the assessed value, while others hire companies to assess the properties in their communities every few years or so. The way assessments are made, as well as the percentage paid, varies around the country.
Some jurisdictions require the owner to pay taxes on 100% of the assessed value, while others can drop to 10% of the assessed value. It all depends on where the property is located.
Homeowners can appeal the assessor’s appraisal if they think the number is too high.
How are the rates calculated?
Each jurisdiction will have different millage rates. The millage rate is the amount per every $1,000 of a property’s assessed value.
Different agencies in each jurisdiction, such as the school board or the township council, have different millage rates. Local elected officials usually set these rates, but these rules vary wildly from jurisdiction to jurisdiction.
For example, in some states, the only way a school district can increase their millage rate is through a voter referendum, while other states allow local school boards to set the rates.
One mil equals $1 per every $1,000 of the value of the property. So, for example, if the school district’s millage rate is 20, and your home is assessed at $100,000, the annual property tax bill will be $2,000 to the district.
It’s important to know the rates before placing an offer on a home. Although there are several avenues for property tax relief, property taxes will never go away even after the home is paid off.
Keep up with local news
Understanding what’s happening locally is important to know how much you will pay in taxes, now and in the future.
Is the local school district looking to build a new high school? Is the local borough looking to build a new police station? Will these require a millage rate hike in the near future? When was the last time the millage was changed?
These answers will affect your tax bill and should be included in your research when you’re thinking about where to buy a home.
How do you pay property tax?
Most people with mortgages have their property taxes included in the monthly payment.
The amount, broken down into 12 pieces, is paid monthly to the mortgage lender and placed in escrow. The mortgage company then pays the tax once or twice a year according to the payment schedule.
Make sure to know the dates property taxes are due, as penalties will be assessed for missing deadlines, and the penalties will go to the homeowner, not the lender.
Ways to lower your property tax bill
A good tax attorney will be able to help save some money on property taxes. But people looking to save money on their property taxes should look at the following exemptions.
A homestead exemption keeps you from paying tax on a portion of your home value.
Again, each jurisdiction is different, but there are rules in place that allow certain people to pay property taxes on a portion of the assessed value for the primary residence.
Some states tie this to income levels, others to age groups, and some make you apply for the exemptions every year.
Seniors and disabled
Almost all the states offer property tax exemptions for people over the age of 65, or who are disabled. Your community may offer specific programs for these groups and a local housing counselor will be able to help navigate the process.
While some states offer property tax exemptions to all veterans, others only offer the deal to disabled veterans. Parents and widows of disabled service members may also get property tax exemptions.
Renovation and energy improvements
Many states give property tax breaks to people improving their home with renovations. For example, in parts of Illinois, homeowners who make improvements on their home can get a break on the increased value the renovations caused for four years.
Some states and communities also offer breaks for folks who make their home more green or energy efficient.
A good source to find out if your area qualifies for energy breaks is the Database of State Incentives for Renewables & Efficiency.
A visit to the tax assessor’s office or an appointment with a local tax attorney will go a long way answering questions about exemptions and anything else related to property taxes.
A visit to the town council meeting or school board is also one way to determine if the community is right for you before making this major purchase. Remember, these elected officials are often the ones who decide how much you will be paying in property taxes.
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Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.
This article does not constitute specific property tax advice. Please consult a tax attorney or your local tax accessor’s office regarding your specific situation.