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How Do Real Estate Taxes Work? Your Questions, Answered

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How Do Real Estate Taxes Work? Your Questions, Answered



As Benjamin Frank said, nothing in the world is certain except death and taxes. In fact, we can even get taxed after we die, but we'll cover that later.

Owning a home is part of the American dream and is advantageous to renting in several ways. But exactly how do real estate taxes work? You will still have to give Uncle Sam his dues.

Don't let taxes catch you by surprise. Read ahead for all you need to know about property tax.

The American Dream

At one point, Americans were obsessed with the notion of having a large house, white picket fence, 2.5 cars, and 3.5 children.

There is nothing wrong with any of this. But nowadays, that is not as easy as it once was and our tastes have changed. Many of us want an environmentally friendly lifestyle, fewer children, and less cliche yard fixtures.

Regardless of the style of the fence, however, you are going to have to shell out the bucks. That is the price of having your own piece of real estate.

Owning Vs Renting

The studies have shown that millennials are much less likely to buy a home when compared to previous generations. And it's not because they don't want to.

Is it because they blow all their money on avocado toast and fidget spinners? Not likely.

Unfortunately, it has a lot more to do with stagnant wages and a high cost of living prevents them from being able to save up for a deposit. Ironically, we can't stop renting because renting is too expensive.

The Benefits of Owning a Home

If you worked and saved your way to being able to sign on a home, you deserve a pat on the back. It wasn't easy but was it worth it?

For many people, the answer is yes. There are several reasons why owning a home is an advantage.

1. Stable Payments for Years To Come

People who rent are subject to rent hikes. Generally, they sign a contract agreeing to a certain price over a given amount of time.

Once the time is up, you might be thinking that you'll just sign for another year because, after all, you really like where you live. Unfortunately, the landlord decided that since all the hipsters moved in, the price is going to double.

You can thank gentrification for that. On the other hand, homeowners pay a monthly mortgage at a fixed rate.

2. Increased Equity

Here, equity refers to the 'percentage' of your home that you have paid for and technically 'own'. This will come in handy if the value of the home increases.

3. Investing for the Future

We are all supposed to save something for a rainy day. What better investment than to own a house. 

The total value may fluctuate, but a house or any building will always retain significant value.

How Do Real Estate Taxes Work?

OK, so owning a home is clearly a good thing. There are a few little catches, however.

Aside from being responsible for all the maintenance and upkeep, you will be required to pay a real estate tax. Of course, the notion of paying taxes for things you 'own' is annoying but it's part of living in our society. 

There is (almost) no way to get around it. You want to be a responsible homeowner but exactly how do property taxes work?

What Is It?

You are have probably heard the terms real estate and/or property taxes before. They are, in fact, synonymous. 

On official documents, such as those made by the Internal Revenue Service, use the term 'real estate tax' but most normal people just say property tax.

In a nutshell, it is a compulsory payment you must give the government for anything you own that can't be easily moved.

Who Has To Pay?

Anyone who owns 'immovable' property will owe a property tax. This refers to 'brick-and-mortar' permanent buildings and land.

So houses, commercial buildings, farms, and plots of land all have to pay a real estate tax.

Before you find a way to put your house on wheels, remember that automobiles, RVs, mobile homes, boats, and planes are taxable as well. They are simply filed under 'movable' assets but you will still have to pay a tax.

Calculating Your Property Tax

Generally speaking, you will be charged a certain amount every year as a property tax. Many people just suck it up and pay it but you might be wonder exactly how they calculate what you owe?

Since you want to avoid overpaying come tax season, it is useful to know how your taxes are being calculated. 

You pay a certain percentage of your property's value as a tax. In theory, the more your property is worth, the more you should pay. That way, millionaires and billionaires should contribute to federal and state revenue more than someone on welfare struggling to get by.

The Assessor

'The Assessor' sounds like a 90s Mel Gibson flick. In reality, an assessor is a government official that determines how much a given property is worth. They assess your property's value.

This is really important because that is probably the biggest determinant for the amount of taxes you will owe.

Factors that Determine Property Value

Since the amount of money you will pay depends on what your property is worth, its good to know how that is determined.

Here are a few key factors an assessor will look at when making their calculations.

Location, Location, Location

Anyone looking interested in real estate and architecture will be well familiar with this phrase. Not to be cliche but this obviously factors into your property value.

Interestingly, property values tend to steadily rise since 'desirable' areas and neighborhoods become more and more famous and trendy.

That is why people will value a tiny apartment in Manhattan or San Francisco more than several acres of land in rural Oklahoma.

Access to Public Services

Public services include water, waste management, police and fire departments, emergency services, electricity, and education. Depending on where you live, some of these services are privatized but you get the idea.

Money gained through property taxes funds many of these services. Therefore, if you buy property in remote Alaska where these services aren't available, you could expect to pay less property tax.

Potential for Development

So, maybe the area where you just bought a property just isn't that developed yet. An assessor can take into account that a particular area is going to experience a boom in property value in the near future.

Yes, you might have to pay more for that.

How Does Property Tax Work In Different States?

All fifty states charge real estate tax. Within any state, the amount that people pay for property tax will vary greatly due to the aforementioned reasons.

We can, however, look at how much people pay on average.

In 2019, Louisianians paid a 0.17% tax of their property value while New Jerseyans paid 1.89%. That's an eleven-fold increase in the cost of property tax relative to property value.

States with the Highest and Lowest Property Taxes

Louisiana, Hawaii, Alaska, Delaware, and West Virginia are the states where residents pay the least. Technically, the District of Columbia (D.C.) would be the fifth least if it were a state.

New Jersey, New Hampshire, Texas, Nebraska (yes, Nebraska), and Wisconsin have the highest rates.

Remember, there are other taxes, costs of living, and other factors to consider before you sign on that house in Whittier, Alaska.

How Does Real Estate Work for Special Populations?

We're almost there. It is important to remember some people will pay more taxes than others.

Married Couples

There are several states that have special rules for what is known as 'community property'.

It may make sense for certain couples to files their property taxes separately but this should be considered on a case by case basis.

Note that the IRS recognizes married couples but not 'domestic partnerships' when filing federal taxes. Someone should tell them its 2020...

Churches and Non-profits Organizations

Church and non-profit organizations are generally exempt from property tax in the United States.

These humble institutions are trying to do good in the world and rely on the generosity of believers and other kind people to survive.

Paying Your Real Estate Tax

With very few exceptions, taxes are going to be a part of life. But owning a home is one of the most satisfying and financially sound decisions you could ever make.

How do real estate taxes work for me? How can I sell a house? Are you interested in learning the answer to these and other questions?

Check out the blog for all you need to know about the world of real estate. Get out there and make your dreams happen.