Upfront costs aren’t the only expenses you should consider as you’re buying a home. Once you own a piece of property, there are many other costs you should regularly stay on top of. This includes property taxes.
If you haven’t owned a home before, you may not know what this expense is, what it’s for or how to determine the amount you owe. Dive into the finer details of property taxes below so you can be better prepared for this cost as a homeowner.
What Are Property Taxes?
A property tax is a fee you pay to your local government. This money pays for services such as schools, law enforcement, road maintenance, sewage, garbage, water and other local amenities and projects that are offered to the community as a whole and affect many community members’ daily lives. Property tax rates can greatly vary between states, so it’s important to check your local government websites for an accurate number.
Property taxes are also regressive taxes, which means the tax rate is the same for those in the same location, regardless of their income. This type of tax can be applied to movable property but for the sake of this article, we’ll refer to property taxes in the context of real estate.
Who Pays Property Taxes?
Individual homeowners, investors and legal entities who own real estate all pay property taxes. The type of property can be a primary residence or second home, a commercial space or an investment property. Individuals who are only renting a home, apartment or condominium are not subject to property taxes since they wouldn’t own the property they live in.
While property taxes and real estate taxes are often used interchangeably, they’re not necessarily the same. Property taxes can be applied to both real estate and tangible personal property while real estate taxes are applicable to “real property” only, which includes buildings, land and structures.
In addition, property taxes shouldn’t be confused with personal property taxes, which are applicable to movable property, such as cars or boats, but not on stationary property, such as real estate.
When Do You Pay Property Taxes?
The schedule of your property tax payments depends on where you live. It can vary from monthly to annual to semi-annual and you may be able to look up the exact due dates on your local government’s website.
Many property tax payments are actually part of your mortgage payment. Lenders would collect this tax from your payment and put it into an escrow account. Property tax would then be paid with the money from this account whenever the payment is due. While you can directly pay your tax authority, there may be restrictions. Speak with your lender to understand the details of this option.
Keep in mind that if you don’t pay your property taxes, your local government can put a lien on your home and seize proceeds to make back that money when you sell your property.
How Do You Calculate Property Taxes?
This tax is an ad-valorem tax, which means that it’s based on the assessed value of your property. You can estimate your property taxes with this simple formula:
Property Tax = Assessed Property Value x Tax Rate
Each variable of this formula has multiple factors so while you can’t calculate the exact amount of your property tax, you can get a close estimate. This can help you prepare your finances for this payment.
To find your “assessed property value,” you can research similar properties or home sales in your area or look up your property on your local municipality’s online tax resource. Keep in mind that your assessed property value is not the same as your appraised value. You would then need to subtract any exemptions you may have, including veteran exemptions, homeowners with disabilities exemptions and more.
Your tax rate depends on what state, county or city you live in, and they could fluctuate depending on market conditions. Your county or city tax assessor website is the best resource for property tax rate information. However, you could find your specific tax rate from online sources such as the Zillow® Property Tax Calculator website, the Tax Foundation® website or the Nationwide Environmental Title Research, LLC.
In general, the more your home is worth, the more you’d expect to pay in property taxes.
Know All Your Homeowning Expenses
Do you know all your costs as a homeowner? It’s imperative to educate yourself on the full scope of expenses, including property taxes. Here are some important costs you should stay on top of:
- Mortgage payments
- Private mortgage insurance
- Homeowner association or condominium fees (often included as part of escrow)
- Homeowners insurance (also often included as part of escrow)
- Utilities, including gas, electricity, water, waste disposal and internet
- Home security systems
- Landscaping and lawn care
- General home maintenance
- Future home upgrades or remodeling projects
Don’t let homeowning costs sneak up on you. You must keep property taxes in mind as you determine what you can afford on a monthly basis in addition to your mortgage payments while you shop for a home.
For tax advice, please consult a tax professional.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
