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What is Property Tax?

Robinhood LearnJune 17, 2020
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
definition

People who own real estate pay a property tax to the government, based on the value of the land that they own, including the value of buildings on that land.

🤔 Understanding Property Tax

Governments impose a property tax on people who own real estate. Typically, the tax is based on the value of the real estate, including the land and any buildings or improvements that have been made to it. In the United States, property taxes are usually imposed by local governments, and the revenues are used to fund local initiatives, such as schools. Some areas offer tax incentives for owner-occupants or other property owners, reducing their tax bill.

example

In Boston, Massachusetts, the property tax rate for residential property is 1.054% as of 2019. City assessors will assign a value to the property and calculate the tax that you owe using that calculation. If you own a home worth $400,000, you’ll pay $4,216 in property tax.

Boston also offers incentives for owner-occupants, called the residential exemption. If you live in the real estate that you own, you can deduct as much as $2,719.09 from your property tax bill, potentially reducing your total cost to $1,496.91.

Takeaway

Property tax is like paying rent to the government…

You own your home and the land that it sits on, but you still take advantage of government services like connections to utility systems, roads, schools, and emergency services. The property taxes that you pay help to fund these services so that you can keep using them.

Tell me more...

What is property tax?
Why is property tax important?
What are property taxes used to pay for?
When are property taxes paid?
Where can I find out how much property tax I’ve paid?
How are property taxes determined?
What are mill levy and millage tax?
How is property valued?
Where do I find this year’s property tax rates?

What is property tax?

Property tax is a tax that real estate owners pay based on the value of the real estate that they own. The more valuable the real estate, the more that the owners will pay. Typically, these taxes are imposed by local governments.

You can think of property tax like rent that you pay to the government. In exchange for being able to use the services the government provides to landowners, you have to pay property taxes.

Why is property tax important?

Property tax is important for the same reason that all taxes are: You have to pay them one way or another. If you own and live in your home, you directly pay property taxes to the government.

If you rent, the amount that your landlord charges will be affected by the property tax rate because your rent payments have to help cover the taxes. If you shop at businesses, the prices of products will be impacted by property taxes as those taxes are an expense the company has to pay.

What are property taxes used to pay for?

What property tax income is used for will vary from place to place. Each government that charges property taxes can choose what it wants to do with the money that it receives.

Typically, communities use property taxes for similar purposes. These include funding schools, road construction and maintenance, local government costs, and upkeep and maintenance of public areas such as parks.

When are property taxes paid?

Each government that charges property tax can choose when the property tax bills are due.

Most places send a tax bill every six or 12 months, so you will have to pay your property taxes once or twice per year.

If you still have a mortgage, you will likely have to pay your property taxes through an escrow account (an account where your funds are held in trust by the mortgage lender until the taxes are due to the government). Many lenders set up escrow accounts and require that you make monthly payments to cover your property tax bill whenever you make a mortgage payment. If you pay your property taxes through an escrow account, you’ll pay your taxes on a monthly basis.

Where can I find out how much property tax I’ve paid?

If you want to know how much you’ve paid in property taxes, you have a few options.

If you have a mortgage and pay your property taxes through an escrow account, your lender should report that on your Form 1098. If you get the form at the end of the year, you can see how much you paid by looking at Box 10 on the form.

If you aren’t paying your property taxes through escrow, you can review your own bank or credit card records. Look for any tax payments that you’ve made to your local government and add up the amounts to find your total taxes paid.

Finally, if you contact your city or county assessor, they should be able to check your property’s records to determine how much you’ve paid in taxes. Some assessors’ websites give you the option to look up your property online, making it easy to check.

How are property taxes determined?

Property taxes are set by the government charging the tax, just like any tax. Your local government can decide on the tax rate and any deductions or exemptions it wants to provide. For example, some cities give a deduction to people who own a home and live in it rather than renting it out.

Your final tax bill is determined by using the value of your property and the tax rate and then accounting for any deductions or exemptions.

What are mill levy and millage tax?

A mill levy or millage tax is a tax that is expressed as the rate that you pay per $1,000 in value (mill means thousandth). Most property taxes are expressed as millage taxes.

Most other tax rates are a simple percentage. For example, you might see a sales tax expressed as 5%. You’ll pay a tax of 5% of the transaction’s value, so if you make a $100 purchase, you’ll pay $5 in tax.

Real estate values tend to be in the tens or hundreds of thousands of dollars. Rather than quoting a percentage, most property taxes are listed as $1.04 per $1,000. So, if your property is worth $100,000, you’ll pay $1,040.

Mill levies are just a different way of providing the same information as a percentage rate.

How is property valued?

Valuing property for property taxes is a complicated process. Local governments employ assessors whose job is looking at all the property in the area and assigning a tax value to it. This tax value is used to determine the property tax that is owed for each parcel of land. Assessments can employ any combination of a few different methods of valuing land.

One of the most basic methods of valuing property is to look at recent sales. If you just bought a home for $250,000, it’s reasonable for the assessor to say that the value of the property is $250,000. Assessors also use recent sales numbers as a starting point before adjusting the value based on improvements, changes in market conditions, or the state of the property.

Assessors might also use the replacement cost method. This method looks at how much it would cost to replace the property. Assessors will account for labor costs, material, and depreciation when using this method.

The income method looks at how much rent a property would generate if rented out, after accounting for maintenance, insurance, and property management.

Where do I find this year’s property tax rates?

Property tax rates vary from state to state, county to county, and even city to city. The best place to find your property tax rate for the year is your city’s assessor office. Most city’s or town’s websites will have a page for the assessor’s office and will list the property tax rate.

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