The Buyer's Guide: How Are Property Taxes Calculated?

Warning: If you are not currently a home owner or planning to buy in the future, I suggest you continue on to a more exciting topic, such as MK Life Tips: The High/Low of Home Design😉. For all current home owners and potential buyers, please read on below as this is extremely valuable information you'll want to understand. 

In the rush and excitement of buying a home, it’s easy to put the annual expense of property taxes somewhere in the rear recesses of your mind, but knowing how your taxes are calculated can certainly help make it a little easier to write that check when the time comes. The calculation can be one of the most confusing challenges for homeowners, and it isn’t done the same way for all local governments,  but does often follow the same general rules.

What is the definition of property taxes?

Property taxes are considered an ad valorem tax–from the Latin for “according to value.” That is why they are calculated based on an assessment of your property’s value.

What are property taxes used for?

They can be a major source of funding for a city or county. Local property taxes fund schools, police and fire departments, libraries, and other municipal facilities and projects. Some property tax bills itemize how much of your tax payment is earmarked for certain government and public expenses.

Photo by  STIL  on  Unsplash

Photo by STIL on Unsplash

How and when is my property value assessed?

Your home’s value is determined by your local tax assessor’s office. Property assessments might be done annually, or possibly just every five years. It varies depending on state or local law. You should receive your value assessment first, and your property tax bill not long after.

The assessment is based on the tax assessor’s estimate of your home’s market value, which is typically determined in one of three ways:

  • Sales comparison: The assessor compares your home to similar properties that have sold in the immediate area in the recent past. The assessment is next adjusted for variables that may make your property more or less valuable than those that have sold, such as a swimming pool, upgraded kitchen, new roof, and new bathroom fixtures.
  • Cost method: The assessor calculates how much it would cost to reproduce your home from the ground up, including materials and labor. They factor in depreciation if your property is older, then add the value of your land.
  • Income method: Used primarily for commercial and business properties. The assessor estimates how much income you would expect to receive if the property were rented out, based on factors such as maintenance costs, insurance premiums, and current rental rates.

To calculate your property tax, your assessment is multiplied by the local tax rate, sometimes called a millage rate or mill rate. One mill equals one-tenth of one cent or $1 for every $1,000 of a property’s value. Different governments are allowed to charge varying mill rates. A home’s property tax is almost never based on just one mill. Communities often determine how much tax revenue they will require in a given period, then set a mill rate commensurate with raising that amount of money through property taxation.

Here’s an example:

Your property assesses for $250,000. Your local mill rate is 45. Multiply the property’s value by 4.5 percent to determine your tax bill: $11,250 for the year. If your mill rate is only 15, your tax bill would drop down to $3,750 based on the same value.

Are property taxes limited by state law in California?

Yes. They are limited by Proposition 13, a law approved by California voters in 1978. Proposition 13 has two important features: First, it limits general property taxes (not including those collected for special purposes) to 1 percent of a property’s market value. Second, it restricts increases in assessed value to 2 percent annually. Those two rules keep California’s overall property taxes below the national average. However, there have been recent efforts to repeal Proposition 13 or change its limits. If you own a home in California, follow the news about this effort so you won’t face any big surprises.

How are property taxes paid?

Your tax due can be paid as part of your monthly mortgage payment, or with annual or semi-annual payments made directly to your local tax authority. Some localities might accept monthly payments. Contact your tax authority for the most up-to-date information for your home’s location, particularly if you’re considering buying a property and want to anticipate what your tax bill will be.

Are property taxes deductible?

In many cases, they are, as long as you itemize deductions on your federal tax return. Not sure? Consult a tax accountant or lawyer when preparing your taxes or having them done for you by a third party.

I hope this article gave you some insight into what makes up your property taxes and how they are calculated. More questions? Feel free to reach out to me and I would be happy to answer.

Source: BHHS Blog