Property taxes help fund important services like schools, roads, and emergency response. Many homeowners pay these taxes through an escrow account, which ensures they are paid on time and avoids financial issues. Knowing how escrow taxes work is important for homeowners and real estate agents because they impact mortgage payments and financial planning. In this article, you will learn how property taxes are calculated and managed so you can manage finances better.
What Are Property Taxes?
Property taxes are annual or semi-annual taxes levied by the government on real estate properties. Homeowners pay based on their property’s assessed value and local tax rate, which varies by location. County assessors determine property values, while local governments set tax rates. However, these taxes also increase.
Tax assessments determine how much property tax a homeowner owes. In most areas, the tax is about 1% of the purchase price or the home’s current market value. This amount can increase annually, but only by 2% to prevent drastic spikes. In addition to the base tax, local governments may add extra charges, such as city or county fees, school district taxes, and special assessments.
Real estate professionals and lenders often use a general range of 1.25% to 1.5% of the home’s purchase price to estimate property taxes. However, this can vary depending on the circumstances. Local authorities often review property values, especially after a sale or zoning change, which can affect how much you owe.
Secured Property Taxes
Secured property taxes, a specific property tax, are tied directly to real estate. The property acts as collateral, meaning unpaid taxes can lead to a lien or foreclosure. Unlike other taxes, secured property taxes stay with the property even if ownership changes, making it essential for buyers to check a home’s tax history before purchasing.
How Property Taxes Are Calculated
Formula for Property Taxes: Assessed Value × Tax Rate = Annual Property Taxes
Assessed Value – Local governments assess property values to establish a basis for taxation. This assessed value often reflects a percentage of the property’s fair market value, depending on jurisdictional regulations. Therefore, if a property’s market value is $300,000 and the local assessment rate is 50%, the assessed value would be $150,000.
Tax Rate (Mill Rate) – Tax rates, commonly called mill rates, represent the tax payable per $1,000 of assessed value. One mill equals $1 in tax for every $1,000 assessed value. Local jurisdictions determine these rates and can vary significantly based on budgetary requirements and public service funding needs.
Annual Property Taxes – The annual property tax is calculated by multiplying the property’s assessed value by the local tax rate. If you have an assessed value of $150,000 and a tax rate of 20 mills (or 0.02), the annual property tax would be $3,000.
Property Tax Calendar
To avoid surprises, homeowners should be aware of key property tax deadlines. Here’s an easy breakdown of the tax calendar:
- February 1st – Second installment of property taxes is due.
- March 1st – Assessment date, when property values are reviewed for tax purposes.
- April 10th – The second installment becomes delinquent if unpaid by 5 PM.
- July 1st – Beginning of the new fiscal tax year.
- November 1st – First installment of property taxes is due.
- December 10th – The first installment becomes delinquent if unpaid by 5 PM.
Missing these deadlines can lead to penalties, interest fees, or even tax liens on the property, making it crucial for homeowners to stay informed and proactive about their property tax obligations.
Why Real Estate Agents Need to Know This
Real estate agents must understand property taxes to help clients avoid closing complications and unexpected financial surprises. By explaining how property tax payments work, agents can ensure buyers are prepared for their property tax obligations, making it easier to budget and commit to a mortgage with confidence.
Key Takeaways
- Property taxes support schools, roads, emergency services, and other public infrastructure, making them a crucial financial obligation for homeowners.
- Property taxes are based on the assessed value of a home, typically around 1% of its purchase price or market value, with annual increases capped at 2%.
- In addition to the base tax, local governments may impose extra fees for city services, schools, and infrastructure projects, which can raise the total tax bill.
- These taxes are tied to the property itself, meaning unpaid taxes can result in liens or foreclosure, even if the home is sold to a new owner.
- Key installment due dates, such as February 1st and November 1st, help homeowners stay on track and avoid late fees or legal consequences.
- Investopedia. (2023, May 15). Assessed value: Definition, how it’s calculated, and example. https://www.investopedia.com/terms/a/assessedvalue.asp
- Investopedia. (2023, May 15). Property taxes: How they are calculated and ranking by state. https://www.investopedia.com/articles/tax/09/calculate-property-tax.asp
- Neighborly. (2023, June 10). What home improvements increase property taxes? https://www.neighborly.com/expert-tips/what-home-improvements-increase-property-taxes
- Accounting Insights. (2023, August 20). What triggers a property tax reassessment? https://accountinginsights.org/what-triggers-a-property-tax-reassessment/
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