As a real estate professional, it’s essential to have a firm grasp of property taxes and how they are calculated. Read on to learn more about the intricacies of property taxes and be armed with the knowledge you need to guide your clients through this aspect of property ownership confidently. We’ll explore the key factors in calculating property taxes and provide valuable insights into the process.
What are Property Taxes?
Property taxes are a form of taxation imposed by local governments on real estate properties. These taxes play a crucial role in funding public services and infrastructure, which include schools, roads, public safety, and local government operations. Property taxes serve as a significant source of revenue for municipalities.
How Are Property Taxes Calculated?
Calculating property taxes involves several components. Let’s break down the process of calculating property taxes.
1. Assessment of Property Value
The first step in calculating property taxes is determining the property’s assessed value. This value is typically based on the property’s market value, the price it would sell for in the current real estate market. Local assessors are responsible for evaluating properties and assigning them an assessed value.
2. Tax Rate
Once the assessed value is determined, the local government sets a tax rate, often called the millage or mill levy. This rate is expressed in mills, where one mill represents one-thousandth of a dollar. For example, a property with an assessed value of $300,000 and a millage rate of 50 mills would have a property tax of $15,000 ($300,000 x 0.050).
3. Calculation of Property Tax
To calculate property tax, multiply the property’s assessed value by the assessed rate. This will give you the base amount of property tax owed. Keep in mind that different areas may have additional taxes or exemptions that could affect the final amount.
Let’s see an example of what this might look like. In Tennessee, property taxes are assessed at a rate of 25% of the appraised value of residential properties and farms. Commercial and industrial properties are taxed at 40% of the appraised value. So, if you had a house with an appraised value of $100,000, the assessed value would be $25,000, or 25% of that $100,000.
Next, you’ll need to look at your tax rate, which your county commission sets. If your tax rate is set at $3.20 per hundred of assessed value, to figure your tax, you would multiply the assessed value ($25,000) by the tax rate (3.20 per hundred dollars assessed.) So, where does that leave us?
$25,000/100 = 250 x $3.20 = a tax bill of $800.
4. Exemptions and Deductions
Many jurisdictions offer property tax exemptions or deductions for certain groups, such as senior citizens, veterans, or individuals with disabilities. These exemptions can significantly reduce the overall property tax burden.
5. Property Tax Caps and Limits
Some areas may impose caps or limits on how much property taxes can increase annually. This is important for property owners to understand, as it can impact their long-term financial planning.
6. Special Assessments
In addition to standard property taxes, there may be special assessments for specific purposes, such as infrastructure improvements or public projects. These assessments are typically based on factors like property size, location, or benefit from the project.
How to Pay Property Taxes
Paying property taxes is a crucial responsibility for property owners. Property tax bills are typically sent out annually or semi-annually by the local tax assessor’s office. Property owners can choose from various payment methods, including online payments, mail-in checks, or in-person payments at designated government offices. Paying your property taxes on time is important to avoid late fees, interest charges, or even potential penalties such as liens or foreclosure proceedings.
When you have a mortgage on your home, property taxes are typically paid through an escrow account. Here’s how it works:
When you get a mortgage, your lender may require you to set up an escrow account. The lender manages this account, which is used to hold funds for property taxes and homeowners insurance.
As a part of your monthly mortgage payment, you’ll contribute a portion toward property taxes. The lender collects this amount and holds it in an escrow account.
When property taxes are due, your lender uses the funds in the escrow account to pay the taxes directly to the tax authority on your behalf.
What Happens if You Don’t Pay Property Taxes?
Failure to pay property taxes on time can have serious consequences. If property taxes remain unpaid, the local government may impose penalties and interest charges or even initiate legal action to collect the overdue taxes. This can include placing a tax lien on your property, which could eventually lead to a tax sale or foreclosure.
Additionally, unpaid property taxes can negatively affect your credit score and overall financial well-being. Prioritizing property tax payments is crucial to avoid these potential repercussions and maintain good standing with local tax authorities.
Tips for Managing Property Taxes
Navigating the world of property taxes can seem daunting, but with the right approach, you can effectively navigate this aspect of property ownership. Here are some essential tips to help you and your clients stay informed and on top of property taxes:
1. Stay informed about local regulations.
Property tax regulations can vary significantly from one area to another. It’s crucial to stay informed about the latest local regulations, changes in tax rates, and any potential exemptions or deductions that could impact your property taxes. Regularly check with local tax authorities or seek expert guidance to ensure you have the most up-to-date information.
2. Plan ahead for tax increases.
Property tax rates can change over time due to shifts in local budgets or government priorities. When advising clients, encourage them to include potential property tax increases in their long-term financial planning. This proactive approach will help prevent surprises and ensure they’re prepared for any adjustments to their tax obligations.
3. Explore exemptions and deductions.
As mentioned above, many jurisdictions offer property tax deductions and exemptions for specific groups or circumstances. It’s essential to explore these options and determine if your property or your client’s property qualifies because it can help significantly reduce their overall tax burden.
4. Challenge property assessments if necessary.
If you believe a property’s assessed value is inaccurate or unfairly high, you or your clients have the right to challenge the assessment. This process, often known as a property tax appeal, involves providing evidence to support your claim. While it may require some effort, successfully appealing a property assessment can lead to substantial savings.
5. Understand tax payment options.
Different areas have varying schedules for property tax payments. Some may offer the option to pay in installments, while others require a lump sum payment. Understanding payment options and deadlines will help you plan accordingly and avoid late penalties.
6. Monitor for errors.
Mistakes can happen, and property tax assessments are not exempt. That’s why you should regularly review property tax statements to ensure accuracy. Look for discrepancies in assessed values, exemptions, or other relevant details. If you spot an error, address it promptly with the local tax authorities.
7. Consider asking tax professionals for advice.
For complex property portfolios or situations involving multiple properties, seeking the expertise of a tax professional can be incredibly beneficial. Tax professionals specializing in real estate can provide valuable insights, optimize tax strategies, and ensure compliance with all regulations.
Property taxes are a critical consideration in real estate, and being well-versed in how they are calculated and how to manage them is a valuable asset for any real estate professional. Remember, each property is unique, and understanding the ins and outs of property taxes will empower you to provide sound advice that meets your clients’ financial goals and expectations. Ready to get started in the exciting world of real estate? Colibri Real Estate School has helped 520,000 students and counting with real estate exam prep, continuing education courses, and more. If you’re interested in exploring flexible online learning to get your real estate license, contact us today to learn more.
