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Real Estate and Property Tax: How to Calculate What You'll Have to Pay

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Real Estate and Property Tax: How to Calculate What You'll Have to Pay



You're house hunting and finding quite a few places within your budget . . . or so you think. But there's something you're confused about. You're confused about how property taxes are calculated. 

Believe us: you're far from the only one. Even existing homeowners can have a difficult time understanding the calculation of property taxes.

Fortunately, however, we can help you out. So, without further ado, here's how to calculate your property tax burden. 

What is the Difference Between Real Estate Tax and Property Tax?

You've heard the term real estate tax. You've heard the term property tax. Now you're wondering: what's the difference between the two? 

In short: nothing. These two terms are used to describe the same thing (the IRS calls it real estate tax while everyone else calls its property tax). That "thing" is the money that's paid to the government in exchange for the continued use of a piece of private land. 

What are Property Taxes Used For? 

Property taxes are local taxes. They're paid to the municipalities in which houses reside. As such, they're used to cover local expenses. 

These expenses include schools, roadways, parks, libraries and other such entities. Generally speaking, nicer areas will have higher property taxes. This makes sense, as the increased revenue is typically used to establish nicer amenities. 

Calculating Property Tax

There is a great deal that goes into the calculation of property taxes. We're going to get into each aspect below. 

Understanding the Assessed Value

There are two values assigned to each house: assessed value and appraised value. Whereas the appraised value describes the current market value of the house, the assessed value describes its value for tax purposes. 

Depending on the states in which they're located, homes can be assessed anywhere from every year to every 7 years. That said, most states assess homes every 5 years. 

When they're assessed, the assessors base their values on a number of different factors. These factors include but aren't limited to the size and condition of the land, the size and condition of the home, access to utility lines, and the potential of the property as a whole. 

Note, the assessed value of a home is generally much smaller than the appraised value of a home. It's exceedingly rare for assessed value to exceed the appraised value. 

Understanding Mill Levy

The other component of property tax calculation is the mill levy. The mill levy is essentially the total property tax rate in a given area. It's generally comprised of city, county, and school district taxes. 

To understand the mill levy, you must also understand the meaning of the word mill. Mill comes from the Latin word "millage". It means "thousandth".

For the sake of property taxes, 1 mill is equal to 1/10 of a single cent, or a thousandth of a dollar. So, for $1,000 of assessed value, each mill would be worth $1. 

Mill levies are comprised of all local tax rates combined. For instance, if the school district tax rate is 0.5%, the city tax rate is 1%, and the county tax rate is 1%, the total mill rate would be 2.5%. This would be a mill levy of 25.  

Note, mill levies vary based on what the school, county, and city need to pay for. It might be higher in some years and lower in others. That said, it generally remains in the same ballpark from year to year. 

Understanding Property Tax Exemptions

Though it's not true in all regions, some regions have property tax exemptions. These exemptions knock a portion of a home's assessed value off before the calculation on property tax is made. 

Tax exemptions generally run between $10,000 and $20,000. If you live in a region with a property tax exemption of, say, $15,000, and your home is assessed at $100,000, you would only have to pay property taxes on 85% of your home's assessed value. 

Putting it All Together

You've learned about assessed value; You've learned about mill levy; You've learned about property tax exemptions. Now, to make sense of all of this, we're going to provide a few examples. 

Let's say that your home is assessed at $200,000 and exists in a region with a mill levy of 32. To find your total property tax burden, you would multiply 200,000 by 3.2% or .032. This would be a total of $6,400. 

Now, let's throw an exemption in. Let's say your house is assessed at $320,000, but that your region has an exemption of $20,000. This would knock your assessed value down to $300,000. 

Let's then say that your region has a mill value of 24. As such, you would multiply 300,000 by 2.4% or .024. This would come out to $7,200 in property taxes for the total year. 

How are Home's Assessed for Value?

Homes are assessed for value in a number of different ways. That said, these three methods are the most common. 

Cost Method

The cost method is a method of assessment wherein the assessor determines how much it would cost to replace a certain property. This takes depreciation heavily into account, meaning that older houses are generally given a much lower assessed value than are newer houses. 

So, while a 2-year-old 2,000-square-foot house in a rural area might be given an assessed value of $315,000, a 40-year-old, 2000-square-foot house in that same rural area might be given an assessed value of $250,000. 

Note, though, that other factors are taken into account. For instance, a home that's been remodeled will possess a higher assessed value than a home that hasn't been touched in 40 years. 

Sales Evaluation Method

Another method of valuing houses is to compare them to houses that were recently sold in the area. Equal houses and properties will be compared to houses and properties that are similar to them, and will then be given values to reflect those similarities. 

For instance, let's say that 3-bedroom, 2-story, 1,400-square-foot houses in a specific suburban neighborhood have sold for an average of $280,000 over the last year. Using the sales evaluation method, the assessor would assess a value of $280,000 (or thereabouts) on similar such houses in that suburban neighborhood. 

Of course, the value won't be identical. The assessor will make changes to the figure based on a number of other factors. However, it will be in the ballpark. 

Income Method

The last method of assessment that we're going to review is the income method. This is a method wherein the assessor determines how much income a house could generate as a rental property. It takes into account not only total rent paid, but maintenance costs, management costs, insurance costs, and taxes. 

Jurisdictions that use this method have an established percentage that they use to figure out the assessed value of each house. This percentage is multiplied by the home's true market value. It never exceeds 100%. 

Let's say that the jurisdiction has an assessment percentage of 80%. As such, a home with a true market value of $200,000 would have an assessed value of $160,000 (200,000 x .8 = 160,000). Therefore, the homeowner will pay property taxes based on that assessed value of $160,000. 

Where to Find a Home's Assessed Value

Property assessments are public record. Therefore, regardless of the house you're living in or looking at, you will be able to find its assessed value. 

Generally speaking, this is as easy as typing "property assessments [name of town]" into Google or another search engine. However, if a database does not exist online, you can find the assessment figure by searching the local government or county auditor's website. 

Before buying a house, it's vital that you find its assessed value. This value will have a large impact on your future property tax burden. 

How Often are Property Taxes Paid?

In most municipalities, property taxes are paid either every 6 months or every 12 months. You'll know when to pay because you'll receive a bill from the municipality in which you live. 

If you have a mortgage on your house, your mortgage lender will hold a portion of your loaned money in an escrow account. You will then use this money to pay property taxes at the appropriate times.

If you bought your house outright, you will have to pay property taxes out of your own pocket. As such, you'll need to factor them into your budget. 

Looking to Buy a House?

Now that you know how to calculate property tax, you can perform the most thorough housing search possible. After all, by understanding the way in which these taxes are calculated, you'll be able to search for houses that fall realistically within your budget. 

Need help finding a house? We have you covered. Not only do we provide real estate listings but we also provide resources for properly assessing those listings. 

For instance, check out some of our aerial videos now!