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How Do Property Taxes Work?

Whenever you’re looking to buy a home, you need to understand the all in cost of that home. Doing this will help you budget and plan accordingly.

There’s a lot more that goes into the true expense of a home beyond the listing price. Sure, principle and interest payments play a major role in determining your mortgage expense; as does the homeowners insurance expense. But property taxes can drastically change your monthly payment once factored in. This can make a once affordable home go way out of your budget.

If you’re wondering how property taxes work, you are not alone. Our customers often inquire about this. So, in this article we’ll get into the details of property taxes. Once you finish reading, you should be a property tax expert.

What Is Property Tax?

On a high level, property tax is typically paid once or twice a year to your local government tax collector. Property tax is the ‘fee’ you pay for owning property. Additionally, these taxes are used for the maintenance and funding of the town.

In other words, property tax is simply the money you owe your municipality for your property. Your home isn’t the only property that is taxed. You’ll also pay property taxes on the vehicles you own! This is a financial expense which you’ll be required to pay in accordance with the laws of your local government.

When Is Property Tax Due?

Property taxes are due various times throughout the year. Due dates depend on the county, city, or town. Most commonly, property taxes are either due once a year or twice a year (at the first and middle of each year).

Furthermore, many mortgage lenders may pay the property tax for their customers. To do so, lenders will use the money they keep in the customers escrow account. Instead of the homeowner paying the taxes themselves, the mortgage company will divide the yearly property tax value by 12. In addition, the mortgage company will charge the homeowner as part of their mortgage payment each month. That money will likely be kept in escrow until the property tax is due.

Once due, the lender should pay the property tax on the homeowners behalf.

Why Do We Pay Property Taxes?

Now that we covered some of the basic principles, let’s discuss what property tax is used for.

Property tax is a source of income for the state and local governments. It’s expensive to maintain a town, and the only way to do so is to charge the town's residents a property tax. Furthermore, income that’s received is then used to invest in various buildings, services, and amenities throughout the town.

For example, property taxes are used to help fund things such as the public school system in your town. They also fund the upkeep of the roads, parks, walkways, the first responders working within your town, and more. Property taxes also helps build new schools, pave more roads, or keep the beaches clean. These property taxes are also used to pay for the town's employees.

How To Calculate Property Taxes

Property tax is not calculated off of your income. It doesn’t even take in account of people you have living in your home. There’s a bit of mathematics that goes into the equation, but we’ll keep it high level.

To calculate property tax, you must know the assessed value of your home, and the mill levy or mill rate.

The assessed value of your home is quite different from the appraised value of your home. The assessed value is determined by the city, county, or municipality. The mill levy or mill rate is the amount of tax you pay for every $1,000 of appraised home value. The formula to calculate the property tax is (assessed value x mill rate) / 1000.

Here’s an example:

Assessed Value

Mill Rate

Sum

Total After Dividing Sum By 1000 

$300,000

20

6,000,000

$6,000 in property tax


As shown above, this homeowner would owe $6,000/year in property tax for their property.

What Are Property Tax Exemptions?

Do all residents in the town pay the same amount of property tax? The short answer is no.

Although every property is assessed, all properties are not taxed, or not taxed in full. There are various exemptions one can qualify for. Additionally, these exemptions are not a ‘one size fits all’ approach. This is because various towns, states, counties and cities have their own list.

Some of the more common exemptions include; exceptions, or reduced taxes for senior citizens, those with a disability, veterans, animal welfare centers, churches, or non-for-profits.

Your local government should have a list of all exceptions. Contact the tax collector's office to see if they offer an electronic copy of this document. In the case your local government does not have a list, you can stop by their office. While there you can see if you qualify for any exemptions or breaks on property taxes. It could save you quite a bit of money if so.

Bring It All Together

Property tax, for many of us, is unavoidabled.

The local government invests a lot of money for the upkeep of your town. Between the cost of education, the upkeep, and the various services the government provides - running and managing a town is rather expensive!

In order for a town to keep up with that expense, they must charge their residents. This tax rate changes from county to county, or town from town. In fact, some parts of town have a different tax rate than others.

When calculating your property tax, be sure to consider the total property tax cost before buying a home. Some towns have a high mill rate, meaning the tax expense will be high. Towns with low mill rates will typically have lower tax expenses per year.

Moreover, it’s also worth considering how well the town manages their money and budget. Just because a town is charging you a lot of money in tax doesn’t mean you’re getting a lot of value. The specific town may be spending far more money than they take in; meaning they have to charge their residence even more money just to stay above water.

 

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All material is presented for informational and educational purposes only and should not be construed as individual financial, investment, or legal advice or instruction. ZeroMortgage does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by ZeroMortgage. ZeroMortgage, its affiliates, and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action. ZeroMortgage does not provide tax advice. Please contact your tax adviser for any tax related questions.

This page last updated: March 21, 2022