How Property Taxes Are Collected?

You just bought a house, what’s next? Mortgage, insurance, and property taxes. There’s no running away from these three. Let’s glance closely at the third, property taxes – it’s the tax on the real estate you own and by that, we mean both the value of your house and the value of your land.

Property taxes are an implied obligation that comes with homeownership in the US. Depending on which state you live in, and the assessed value of your house, your property tax bill will vary. You must remember that your annual tax bill isn’t fixed, why? Because the value of your home isn’t fixed.

The amount of your property tax is determined annually according to the market value of your property on a particular date. The entire scenario of tax assessment, mill rate, and property tax calculation can be baffling for new homeowners. If you’re wondering how property taxes are collected, read on!

Assessment Of Property Taxes

People often pay their property taxes without knowing the calculations based on which they are charged. You must understand the basis on which your property taxes are assessed by your property appraiser’s office. This way, you keep your annual bill in check and prevent being overcharged.

First, your local jurisdiction will calculate the total tax rate or mill rate for a region. A mill rate is the amount of tax payable per dollar of the assessed value of any property. If the local property tax rate on houses is 15 mills, you’ve to pay $15 in tax for every $1,000 in assessed value of your property.  Property taxes are evaluated by multiplying the mill rate with the assessed value of your property. You sure can do the math from here!

Wondering how the assessor reaches the assessed value of your property? The market value of your property is first assessed using one of the three methods – sales evaluation, cost method, or income method. Sometimes the market value is also assessed using a combination of these methods. This market value is then multiplied with the assessment rate and that’s how they reach the assessed value of your property.

Let us dive a tad bit deeper. Assessors or appraisers who work for the local taxing authority track and map the value of every property and piece of land in a taxing district. They use professional mapping software to maintain a database of local property values. Let’s now glance at the three methods of assessment in detail:

1.    Sales Evaluation

In this method, the assessor studies comparable sales to value your property. The criteria can vary or can be a combination of the state of your property, new renovations, additional improvements, and the market conditions in your area.

The assessor also evaluates any new changes to the property and performs an assessment on the same. The assessor also compares similar properties that were sold in the area; there are adjustments made depending on what variables make one property more or less valuable than the other.

Also See: State Wise Property Tax

2.    Cost Method

This is a very straightforward way of assessing your property. In it, the assessor will evaluate the value of your property depending on how easy or difficult it is to replace it. You can also call it the replacement cost of your property. If your property is old, assessors will evaluate the amount of depreciation and how much will the property cost or how much will it be worth if it were empty.

If your property is fairly new, assessors will deduct realistic depreciation and evaluate your property based on the cost of labor, cost of building materials by adding them to the final value of your property. You can also see it as the cost it would take to rebuild your house from the ground up, also considering the depreciation and the value of the land your house stands on.

3.    Income Method

In the income method, the assessor will evaluate how much income you’ll make from the property if it were rented out. In this approach, the assessor will consider the cost of maintaining and managing the property, the insurances and taxes, and all the returns you could gain from the property. Basically, it’s what you’d make off the property if you weren’t living on it! Often used for commercial or business properties, this method considers factors such as current rental rates in the market and operating expenses.

Now let’s try to do a mock property tax calculation. Imagine the local mill rate in your area is 15 and your property’s assessed value for the purpose of property tax is, say, $200,000. Then the property tax would be:

$200,000 assessed value / $1,000 = 200 x 15 = $3,000 property tax

OR

$200,000 assessed value x 1.5% = $3,000 property tax

Depending on the tax district you fall under, the property tax assessment will be done annually or every five years. Once the appraiser has done the assessment, you’ll receive your assessment with the property valuation. After this, the property tax bill will be mailed to you! You must also remember that mill rates change from one jurisdiction to another. Depending on the tax revenue needed for the government’s operating budget, it will set the mill rate to raise that amount of money required.

Investors Property Tax Bill Won’t Be The Same As Homeowner

If you’re buying a property from an investment point of view as a rental property, remember that your property tax bill will be higher than the one which a homeowner occupant will pay. Why? Remember the income method we spoke about? It’s because, from the assessor’s perspective, a property that’s used for rental business is worth more than if it were just occupied by the owner.

Yes, that’s applicable since the property is now generating a considerable income and isn’t occupied by you. So if your cash flows are less, it must be your property taxes! A great way to know how much your property taxes will increase as compared to a homeowner occupant is to visit the local tax assessor’s office. But you don’t have to worry because as a real estate investor, the property taxes you pay on your rental properties are deductible from your net taxable income!

Ways Of Paying Your Property Taxes

Once you have been mailed your property tax bill, it’s time to pay it, obviously! There are 3 ways to pay your property taxes:

  1. Go on your assessor’s website and enter your address, you need to pay a small fee to access this material. Then pay your property tax bill, you can do this every year or once in six months when the taxing authority mails your bill.
  2. You can even physically go to the assessor’s office in your county courthouse. Print out the information you need at a small fee and then write them a check.
  3. One more way to do this is to set aside the property tax money in an escrow account whenever you pay your mortgage. The escrow company will then use this money to pay off your property tax bill whenever it arrives, easy!

Know What Your Property Taxes Are Going Towards

As a homeowner who regularly pays their taxes, you have full rights to know what your taxes are going towards. State governments lay down the regulations but don’t collect your taxes; they’re collected by local governments. Property taxes are a major source of income for all the city and county governments. The funds collected then go towards public education, transportation, recreational parks, libraries, etc.

If your property taxes are lower, the government will generate its revenue through other taxes like sales or income taxes. If they’re high, you can be proud of supporting the public education systems. How does it work? The more funds public school districts have, the smaller pupil size per classroom and better education for all!

States With Low Property Taxes

We know you were waiting for this. Though there are no US states that have zero property tax liabilities, there indeed are states where the property tax collections are pretty low! Check if your state features in this list:

State Tax Percentage Median Household Income
Louisiana 0.18% of assessed home value $54,216
Hawaii 0.26% of assessed home value $81,711
Alabama 0.33% of assessed home value $51,014
Delaware 0.43% of assessed home value $67,249
District of Columbia 0.46% of assessed home value $98,620
West Virginia 0.49% of assessed home value $44,940
South Carolina 0.5% of assessed home value $52,001
Arkansas 0.52% of assessed home value $48,177
Mississippi 0.52% of assessed home value $45,925
New Mexico 0.55% of assessed home value $52,032

Source: Business Insider

You can also see our blog on States with Lowest Taxes to get more info on this.

Things That Increase Your Property Taxes

Home Renovations

When you renovate your home to increase its value, the property tax automatically goes up. Yes, home additions and renovations are great investments but do calculate the return on your investment against the property bill that you’ll be meeting. Check if it’s worth it after all! The rise in property tax is because your assessed value goes up when you add an additional square foot, upgrade the drainage system in your yard, etc.

See Also: Increase in Value of Home with Renovation

Moving To A New Property

If you’re moving into a new state or a new neighborhood, there are chances you’ll see a higher property tax. This is especially true if you move into a larger city from a town or if you move downtown from the outskirts. You should do your research and ask the realtor about property taxes before you make the big move.

For Moving to a New State you can find Top Out of State Movers here.

Decisions Of Your Government

If your government decides to improve the local public education system or build a new transportation system, it will need to ramp up its revenue. This automatically increases the property taxes of that region. You could be using that public service or not, but you can’t escape the tax liability!

Lots Of Home Sales Around You

One issue that’s completely out of your control is the sales of homes around your property. When this happens, the assessor immediately views the properties in your area as valuable because the homes in your area are desirable! The assessed value of your property shoots up and there comes a fat property tax bill.

Conclusion

Once you start understanding your property taxes, you’ll be well informed and better aware of what you’re paying. Isn’t that a primary responsibility as a taxpayer? If you think that you’re being overcharged or your home value is assessed wrongly, make sure to walk the assessor through your property and show them any popcorn ceilings, leaking roofs, or old appliances. Assessors often check for things that increase the assessment value and end up overlooking things that pull the value down. Once you get a hang of it, you’ll be the awesome homeowner that pays their taxes and knows the way they are calculated and collected!

Also Read: How to Remove Popcorn Ceiling

FAQs On Property Taxes

Can I Pay My Property Taxes Online?

Yes, you can go to the official website of your local assessor and enter your address. Then go ahead and pay your property taxes! Remember that you’ll be charged a nominal fee to access this website!

Which Are The States With Highest Property Taxes?

According to Business Insider, New Jersey, New Hampshire, Texas, Nebraska, Wisconsin, Illinois, Connecticut, Michigan, Vermont, North Dakota are the 10 states with the highest property taxes. The highest tax is in New Jersey with property tax being 1.89% of assessed home value.

What Are Some Tips To Lower Property Tax Burden?

Not making structural changes to your house like turning an attic into a bedroom or adding a swimming pool, not increasing the curb appeal of your house, talking to neighbors who have similar property as you, and walking your assessor through your property are great tips to lower your property tax burden.

See Also: Buying a House with Swimming Pool

When Is Property Tax Payable?

Property tax is payable either annually or twice a year. The exact time when you’re supposed to pay is decided by your jurisdiction and can change from one local government to another. You should keep track by reading the information on official government websites.

Written by


Rostislav Shetman is the founder of 9Kilo Moving. He has been in the moving and relocation industry for more than 25 years, making him an expert in his field. Rostislav started as a helper, dispatcher and driver and has worked his way up to owning his own company. He takes great pride in his work and enjoys helping people relocate across the United States of America. When he's not working, Rostislav enjoys spending time with his family and friends. They are the light of his life and bring him happiness every day.