Property taxes are often forgotten when planning a budget for a home. It is important to understand how your property tax bill works as your monthly payment goes beyond just your mortgage. As a home buyer, you have several tax breaks available to you, and you have the ability to challenge your property tax if it seems too high. Here are a few things you need to know about property taxes:
Different types of property taxes.
When looking into buying a home, be sure to research how much the home’s property taxes are, as tax rates vary depending on where you live. You will need to include the direct assessments which are the flat fees for services such as landscaping or street cleaning. Some areas use property taxes to fund local projects such as a park or a library – These are referred to as special assessments. In order to properly budget for your new home, you’ll need to factor in both direct and indirect assessments.
Calculating your property tax.
A tax assessor calculates your property tax by first attaching a property value to your home. Adjustments are then made based on local rules to determine the assessed value. Certain counties/locales use different percentages to calculate property tax. This percentage is then multiplied by the home’s fair market value to determine the assessed value. As an example, your county’s property taxes might be based on 20% of your home’s assessed value, so the tax assessor would calculate 20% times your home’s fair market value.
In order to calculate your property tax bill, the accessor divides the assessed value by 1,000 and multiplies it by the mill rate. The mill rate is the number representing the amount per $1,000 of the assessed value of the property. For example, if your home has a taxable value of $200,000 and the mill rate is six, your property tax bill would be $1,200.
You will also want to keep in mind any potential renovations you might undertake after buying the property, as adding square footage could increase your home’s value.
Property tax fees, due dates, and interest.
Depending on your location, you may be required to pay your annual property tax bill in one payment or two. Some counties break up annual property tax into two installments, sending the tax notices separately.
If you are paying a mortgage, you might pay a certain amount into an escrow account. The bank uses this fund to pay the property taxes on your behalf. Keep in mind any fees that you may incur in paying with a credit card, as some counties/states allow you to pay online.
Naturally, paying your property taxes past their due date could result in interest and penalties. If this continues, the government could pay your bill either by putting a tax lien on your home or foreclose it.
With a lien on your home, any funds from the sale pay off delinquent taxes first. In some instances, your mortgage lender will pay the property taxes on your behalf and request reimbursement from you. If you don’t pay the money back, your lender might consider you in default on your mortgage and foreclose.
Property tax relief.
If you belong to certain groups like veterans, the disabled, and/or those who have lived in the same home a long time, the Government often will often offer special tax reliefs. While the exemptions don’t reduce your tax rates they do lower the assessed value of your home.
You also have the ability to challenge the property tax assessment through the tax collector’s office if you believe your tax bill is too high. This is usually disputed when the assessed value of the property appears to exceed actual value. In this case, you can submit evidence to the tax collector to prove your case. If you win your appeal, you will receive a reduction on your property tax bill.
Deducting property taxes from federal income taxes.
While you can’t deduct the cost of special assessments, you can however deduct the amount of property taxes you pay, so long as you itemize your deductions on your federal income tax return. If you pay your property taxes through an escrow account, you cannot deduct the total amount you put into the account, rather only the sum that actually went to the government.