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Understanding property taxes

Exterior of modern two-story home

You may know about certain aspects of buying a home like principal and interest, but there are also less well-known components like property taxes, fire protection, and homeowner’s insurance. 

Buyers and property owners often misunderstand these added expenses because of the different variables involved. Here’s what you need to know about these variables so you can better understand your property taxes: 

What are property taxes?

Property taxes, also known as ad valorem taxes, are imposed on real estate based on the property’s location and value. These taxes are typically levied by local governments that perform tax assessments to determine the right amounts. If you do not pay your property taxes, a lien may be placed on your property

What do property taxes fund?

Property taxes fund a wide range of services within your local community. For instance, property taxes are often used to fund local infrastructure, including roads, water lines, and sewer systems. 

Property taxes also often fund public services, including police departments, fire departments, garbage collection, and emergency medical services (EMS). Finally, and perhaps most importantly, property taxes are used to fund public school systems to provide education to children in the area. 

How are property taxes calculated?

There are two components involved in calculating property taxes: the taxable value of property and the tax rate. 

Property assessment

A property assessment is conducted to determine the value of the property. Assessors or appraisers are employed by the local taxing authority, who can track the value of comparable properties in their jurisdiction. 

Assessors may employ a few different methods to determine the property’s value based on comparable sales, replacement costs, or income. 

Tax rate

Based on the assessed value of your property, you pay property taxes governed by the tax rate in your area. While some property tax rates are expressed in percentages, others may be expressed in “mills” equal to one-thousandth of a dollar. 

For example, if your local tax rate is 20 mills, you would pay $20 in taxes for every $1,000 in home value. If your home has an assessed value of $300,000, you would have to pay $6,000 in taxes, equaling 2%. 

Can you lower your property taxes?

While there’s no easy way to lower your property taxes, there are some steps you can take to appeal your property tax assessment. 

When you appeal your property tax assessment, you’re appealing the assessed value of your home rather than the actual tax rate. 

Appealing your property tax assessment often involves the help of a lawyer, which could easily cost thousands of dollars. In many cases, the time, money, and effort involved in filing an appeal simply aren’t worth the small amount that you could end up saving in property taxes. For this reason, filing an appeal is only recommended if you believe that the value is significantly miscalculated compared to surrounding properties. 

Do you really have to pay property taxes?

Generally speaking, you are required to pay property taxes. There are some exemptions that you should know—namely, homestead exemptions, religious and nonprofit exemptions, disability exemptions, and senior exemptions. 

Homestead exemptions

Homestead exemptions allow you to pay less in property taxes for a primary home that you live in for a majority of a year. Homestead exemptions do not apply to vacation homes or investment properties. 

Homestead exemptions also do not exist in every state. Instead, states have their own unique homestead tax exemption amounts and percentages that are worth researching. 

Religious and non-profit exemptions

Religious institutions like churches and non-profit organizations are not required to pay federal, state, or local taxes. In addition, land that charitable institutions occupy is exempt from property taxes with specifics depending on the size and nature of the property. 

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Disability exemptions

People on disability or disabled veterans may also be exempt from paying property taxes. In most cases, the specific exemption is tied to disability ratings. 

For instance, if you’re considered a fully disabled veteran by the U.S. Department of Veterans Affairs, you may be exempt from all of your property tax costs. If you’re considered only partially disabled, your exemption will reflect the extent of your disability as determined by the government.

Senior exemptions

Seniors often have limited income. As a result, many struggle to pay property taxes on their homes, and many states have introduced property tax exemptions for seniors. In some states, you need to be over the age of 61 to qualify. In others, you need to be over the age of 65. 

To qualify in certain states, your income needs to be below a specific predetermined amount. The exact amount of the exemption also varies by state, with some exemptions being more generous than others. If you are nearing 60, it’s wise to look into senior property tax exemptions offered by your state. 

How do you pay property taxes?

There are two different methods of paying property taxes: the escrow method and the regular method. 

The escrow method

The escrow method is a particularly popular way to pay property taxes. This method takes a lot of the work out of the homeowner’s hands. 

With an escrow account, you pay towards the total cost of your property taxes monthly as a part of your monthly mortgage payment in addition to principal, interest, and homeowner’s insurance. 

When your property tax bill is due, the money you’ve put into the escrow account is used to cover the tax. Most lenders require that borrowers use an escrow account to pay property taxes and homeowner’s insurance until they reach 10% equity in the home. With FHA and USDA mortgage loans, escrow accounts are always required. 

The regular method

If you like to have complete control of your money, you may want to consider paying property taxes autonomously. This is a wise method if you’re a diligent saver and taxpayer who values financial responsibility. Using this method, you save the money to pay property taxes on your own and pay it in a single lump sum. 

In this case, you would simply pay your property taxes just like any other bill. Most jurisdictions allow you to pay your property taxes online, making it easier than ever to manage property taxes without an escrow account. 

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The bottom line

In summary, property taxes help fund public schools and other community services, and they are collected by local taxing units that contract with county assessors. These units include school districts, special districts, counties, and cities. 

Property tax collection begins in October. The deadline for property tax payment is typically in January, with interest and penalty payments beginning in February. There are also local property taxes, such as the Texas local tax determined in August and September. 

Property taxes are just one component of your mortgage alongside principal, interest, and homeowner’s insurance.

For more information about buying a home and tailored advice to help you make it happen, check out Vaster Capital’s real estate resources or reach out to our lending experts



Property Tax Calculator & How Property Tax Works | NerdWallet

Liens: What They Are and How They Work | Forbes

Homestead Exemption Definition - Taxes | Investopedia

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