What Are Property Taxes?

Throughout history, the value of an owner’s property has often served as an essential measure of wealth. Naturally, governments worldwide have relied upon property tax revenues since ancient times, just as they do now.

These taxes can benefit communities with money for critical services. At the same time, prospective real estate buyers need to consider their tax burden when calculating the actual ownership cost. Thus, everybody should understand how property taxes work, why they’re almost universal, and how they may differ from place to place.

What Is Property Tax?

In the United States, various organizations may collect property taxes to generate the revenue they need for providing services such as running schools and maintaining infrastructure. Since the taxing authorities typically base property taxes upon the value of the real estate, they’re called ad valorem taxes.

Multiple taxing authorities often exist within one locality. Each taxing authority will set a tax rate. In turn, they apply this rate to the property’s assessed value. For instance, property owners often need to pay taxes to their local school and water district, and each of these authorities will probably charge different rates.

For instance: Say that a school district charges $1 in taxes for each $100 in assessed value, and the water district charges $.50 for each $100 in value. In this case, a home assessed with a value of $100,000 would result in an annual school district tax bill of $1,000 and a water district tax bill of $500.

Each entity that collects taxes will set its rate and calculate the tax bill based on its real estate value assessment. These assessments can change from year to year as local property values change. In addition, property owners generally have a chance to dispute their assessments each year. For example, the property owner might win the dispute by comparing the assessment with those of similar properties in the area.

Primarily, remember that rates can vary wildly between different communities and various taxing authorities. Thus, individuals and businesses considering property purchases should research local tax rates because they can significantly impact the long-term cost of ownership.

Consider Property Tax as a Cost of Owning Real Estate

Most communities will levy fairly steep penalties for delinquent taxes. The government can foreclose if the owner doesn’t resolve the delinquency quickly enough. Even worse, authorities can impose property liens for the amount of money owed. Real estate purchasers need to consider more than the monthly loan payment when they figure out how much they must pay to keep their homes, land and other buildings. They also need to include the price of property taxes to ensure they keep ownership.

Mortgage companies often keep an escrow account that lets property buyers make property tax and insurance payments in addition to the amount needed to service the loan. This service can make it a lot easier to manage these essential bills, rather than having to save up to make lump sum payments every year. Businesses with multiple properties in various communities might consider using a tax compliance platform to ensure they don’t miss any due dates and can track their receipts and costs.

Real Estate Owners Need to Understand Property Taxes

Property taxes can vary wildly, even between neighboring communities. The bill often adds at least another 10% to the loan payment. Failure to ensure that these taxes are paid can result in steep fines and in the worst cases, foreclosure. Thus, property owners should compare and plan to manage tax payments before and after they buy.

At the same time, property owners should understand how they will benefit from the organizations that enjoy the revenue from property taxes. Tax authorities generally support roads, sewers, schools, libraries, senior centers and other beneficial local institutions. Paying property taxes promptly benefits the property owner and the community.