As most people reckon, taxes are an unavoidable part of life, so it’s sensible to come to accept the fact that, when it comes to homeownership, they are an important aspect to consider. It’s true that, when buying a home, the excitement can often overshadow this technical aspect; nevertheless, it’s crucial that as a buyer you understand how property taxes work, how they are calculated, paid, and, in some cases, even reduced.
According to the annual report of Property Taxes by State and County, 2024 submitted by the Tax Foundation, the average level of property taxes paid across the U.S. was $1,815 in 2022 (the latest year for which national figures were available). As you can see, this value can significantly affect your monthly budget and overall financial planning, so it’s worth keeping in mind when you decide to invest in buying a house.
In this article, we will explain in simple terms how they work and provide essential information that every homebuyer should consider before taking the plunge. So, let’s get into the deets.
What Are Property Taxes?
They are local taxes that homeowners are required to pay -usually annually- based on the value of their property. This suggests that every owner will pay a different sum depending on where their home is located and how much it is worth. Now, who levies them? They are levied at the municipal level (cities or countries, for example), and are used to fund public services, including schools, police, fire departments, and infrastructure like roads and parks.
They are usually assessed annually, so, for example, if you purchase a home valued at $200,000 and the local tax rate is 1.25%, you would be responsible for paying $2,500 in property taxes annually (multiply 200.000×0,0125=2500). The exact amount you pay depends on both the value of your home (including both land and structures on it), and the tax rate set by your local government.
How Are Property Taxes Determined?
As we just mentioned, they are determined by two main factors: the assessed value of your house and the tax rate set by local authorities.
1. Assessed Value
The assessed value is the estimated market value of your property as determined by a local tax assessor: while the house’s market value might be easily determined based on the price you paid, the assessed value could be different, so, when you buy a house, the assessor will typically reassess its value based on factors such as its size and condition, its location, and recent sales prices of comparable homes in the area. In some regions, the assessor may visit you, while in others, they may rely on available data and records. In some cases, these values can be adjusted annually or periodically.
Now, assessed values are not necessarily aligned with market values but can be affected by real estate trends. As a homeowner, you need to keep track of any assessment notices sent by the tax authority as there might be an opportunity to appeal if you believe the assessed value is too high.
2. Tax Rate (or Millage Rate)
Often referred to as a “mill rate”, it is determined by local governments and varies widely between different municipalities. This rate is set to fund various public services within the area. A mill is equal to $1 for every $1,000 of assessed home value. Based on a home value of $200.000 and an example millage rate of 29 mills, you would pay $5.800 in annual taxes.
Both the assessed value and the tax rate come together to calculate your annual property tax bill. In addition, some areas might have specific levies for school funding, local infrastructure projects, or other community needs, which could further affect the amount you have to pay.
How Property Taxes Are Paid
If you’re a newbie to homeownership or you’re moving to a new area, you might have some questions regarding the paying operation. Property taxes are typically paid once a year, but the timing and method of payment can vary depending on where you live. Some areas may allow you to pay them quarterly, while others might collect them in a lump sum. There are different ways to pay, including online payments, checks, or via your mortgage lender.
In many cases, when you take out a mortgage, your lender will collect a portion of your property taxes as part of your monthly mortgage payment through an escrow account. The lender then pays the taxes on your behalf when they are due. This can be a convenient option, as it allows you to spread the payments over the course of the year rather than coming up with a large lump sum. It also ensures that your property taxes are paid on time, reducing the risk of penalties or interest.
Why as a homebuyer, you should care
Property taxes can significantly affect your overall homeownership costs, so it’s important to factor them into your budget before buying a house. Here are a few reasons why understanding how they work is important to homebuyers:
1. They Affect Your Monthly Expenses
Since they represent an ongoing cost that you will need to budget for over the long term. Since they are based on the value of your home, purchasing a more expensive house can lead to a higher rate. This means that even if you can afford the mortgage payments, the taxes may strain your finances, especially if they increase over time.
2. They Vary by Location
They widely from one municipality to another, so it’s important to consider the local rates when comparing homes. For example, a home in one town might have, for example, a tax rate of 1%, while a neighboring town might have a rate of 1.5%. Similarly, certain areas may have higher rates due to additional levies for things like schools, parks, etc. Before purchasing, it’s wise to research the property tax rates in the area to avoid surprises.
3. They Can Change Over Time
Certainly, their rates aren’t set in stone. Your local tax assessor can adjust the assessed value of your home based on market conditions, which could lead to higher rates in the future. Additionally, local governments may raise rates to fund public services, which could result in an increase in your property tax bill. Understanding how they work and knowing the potential for increases will help you plan for the long term.
4. They Can Influence the House’s Value
In some areas, high property taxes may impact the desirability and resale value of a house. Homebuyers may be reluctant to purchase a home in an area with high rates, which could lead to lower demand. On the other hand, lower rates can make a location more attractive to buyers, potentially increasing its value over time.
How to Find Out About Property Taxes Before Buying
Before committing to a house, you can ask the seller or agent to provide you with this information so you can have details about the home you’re interested in. Additionally, you can also check the local government website of the municipality where the house is located. They usually have online databases where you can look up for their specific rates.
Finally, you can contact the local tax assessor’s office directly so they can provide you detailed information on rate assessments.
By taking these steps, you’ll be better prepared to handle the costs of homeownership and avoid any unexpected surprises down the road.
