Knowing what your mortgage payment will be is critical to buying a home you can afford. Learn more about mortgage payments here. However, depending on where you live, nothing impacts your bottom line as much as property taxes. There are also a number of other ongoing costs that could drastically affect the real cost of home ownership. Homeowners insurance, flood insurance, and HOA fees are a few incidentals that can surprise your cash flow projections.
Property tax in the U.S. is a tax you pay your local or state government for the privilege of owning and using property. Land and fixed improvements (buildings) are the primary taxable items, and how each is taxed depends on your local tax code and the property’s purpose. For instance, homes are typically taxed at a different rate, and through different means, than commercial office space. Most areas have agricultural exemptions, which means that owners will pay much lower taxes on land used for raising crops or livestock than they will if the property’s use is strictly residential.
Who collects property taxes?
Property taxes are billed and collected by a tax assessor, generally working for your county (or Louisiana parish, or Alaskan borough). Several months before your taxes are due, the assessor will send you a statement detailing the assessed (taxable) value of the property, and all applicable taxes with their rates. You then write them a check to keep them off your back, and to keep the schools educating kids so they don’t start smashing your windows.
How is property tax calculated?
The dollar amount of your taxes depends on two variables: your property’s assessed value, and the applicable tax rate. Unlike your income tax, which you self-report, or sales tax, which is a flat rate retailers apply to the cost of the sale, the assessor determines the taxable value for you. The property’s value is based on recent sales prices of similar properties, and is typically less than or close to the true market value. Your tax rate is determined by a number of factors, most having to do with how all your local governments raise public funds. Rates are generally consistent, though many tax authorities, particularly school districts, are adept at raising new funds year after year by getting the public to vote for tax increases.
A few of the services your property taxes might be going to pay for include:
- Public schools
- Law enforcement (i.e. sheriff and jail)
- Roads and public transportation
- Libraries and similar public works
- Municipal garbage service
- Animal control
- General county operations (including the guys who assess your taxes)
What if I’m paying too much property tax?
Very few people complain about not paying enough taxes. But if you think your local tax rate is ridiculously high, you can move. Or you can run for office and try and get the laws changed.
If you feel like your home was assessed at too high a value, you can protest with the assessor. To do this successfully, you need to determine what you consider to be a fair assessed value, and provide tax records of comparable properties whose assessed values reinforce your claim. Property tax records are public record, and you can look up all your neighbors’ assessed values online in minutes.
What if I don’t pay my property taxes?
When tax statements are sent out, generally at the beginning of the year, the bill is matched with the property’s record. If the bill doesn’t get paid, the delinquency turns into a lien on the property. When you go to sell the property, the lien amount (along with penalties and interest) is paid to the taxing authority before you get paid for the sale. Liens can severely affect the sales value of your property.
Property tax liens also go on your credit report, making it very tricky for you to get financing for a car, a second home, an investment property, or even a credit card.
The scariest thing about not paying property taxes, however, is that the tax authority can choose to foreclose on the home, kick you out, and sell it to someone else. They’ll keep the amount of the taxes owed, plus a bunch of other fees for their trouble, and likely leave you with nothing, not even a place to lay your head.
Escrow your property tax payment
If you have a mortgage, your lender wants you to pay your property taxes. That’s because if you get foreclosed on and all the equity goes to paying your taxes, they won’t get paid back. Lenders generally require you to prepay your property taxes, month-by-month, into an escrow account that they manage. When the assessed value comes out, there might be some left over, or you might need to pay a little extra. But the payment is far more manageable than if you hadn’t been saving up.
Your bottom line
Depending on where you live, property taxes might be barely on your radar, or they might be the bane of your existence. The state with the lowest property taxes is Louisiana, where the average amount taxed is $243 per year, per home. In New Jersey, the median is $6,579, a combination of extraordinarily high rates and high property values. It’s not uncommon in many states for a home owner’s property taxes to be higher than their mortgage payment! On the bright side, these places might make up for it by having little or no state income tax, or offering lambskin kennels in the dog catchers’ trucks.