What is property tax and how is it calculated?
It seems like no matter where you live, people complain about property taxes. Property taxes are important because they impact how much money you spend annually related to your home and, potentially, how much home you can afford. You’ll be paying property taxes on a yearly basis or at other intervals during the year, and you may pay them from your escrow account as part of your mortgage payments. You’ll also continue paying taxes even after your mortgage is paid off. Let’s take a deeper look at how property taxes are calculated and what they mean for homeownership.
Property tax definition
Taxes, in general, are imposed at both federal and local levels to help cover services that the government provides. More specifically, property taxes are levied on homeowners to cover local community services like garbage pickup, public schools, police, fire departments and more.
How are property taxes calculated
The way property taxes are calculated may vary depending on your local government. They are typically calculated using the property’s assessed value and the combined tax rates (millage rate) from the surrounding districts. You can determine your millage rate and any exemptions by contacting the local taxing authority. As a general benchmark, you can expect to pay about 1-3% of your home's market value per year. Plus, buying a home in a school district with higher funding, test scores and student-to-teacher ratios often correlate with a higher property tax bill. And if you own a larger, well-kept property, then you might find your property taxes are even higher than your neighbor’s.
Property taxes and homeownership
Before purchasing a home, assessing a property’s tax can be helpful in figuring out how much home you can afford. As we mentioned, property taxes are paid on a yearly basis, or at other intervals during the year. They are typically taken from your escrow account, if your account is escrowed. But even after paying off your mortgage, you’ll still be paying property taxes for as long as you own the property. This detail may be worth considering if you’re looking for lower monthly payments in the long term.
Overall, to get a clear picture of your monthly expenses as a homeowner, it may be beneficial to project your mortgage payments, which usually includes property tax, and consider that number when you’re done paying off your mortgage as well.
Property tax deductions
While property taxes can constitute a large expense for many homeowners, there are opportunities to file for property tax deductions during tax season. There are standard tax deductions available to most homeowners, and itemized deductions may result in higher savings in some cases. These deductions, meant to incentivize homeownership, can reduce your tax bill by thousands of dollars. Consulting a tax professional can be helpful when figuring out how and what to file as a homeowner.
In summary
Property taxes help cover local government services and are a part of every homeowner’s reality, even after paying off a mortgage. Factoring property taxes into your calculation is key when figuring out how much home you can afford. Consider consulting a tax professional for further information on property taxes and potential deductions.
