Here’s the 101 on how to calculate property tax, the definition of property taxes, and what exemptions are available.
When you become a homeowner, you take on many new responsibilities. One of them is paying property taxes. Knowing the definition of property tax, how property taxes are calculated, what causes them to go up and down and what exemptions are available is important – and that knowledge can even save you money.
It’s important to know how to calculate property taxes and how much property taxes are. The property tax definition is a type of tax paid on a property owned by an individual. Property taxes are generally levied by county, but often include taxes paid to other local entities like school districts, utility authorities or city governments. The rules, rates and regulations surrounding property taxes can vary significantly depending on where you live. Therefore, these guidelines are general — for specifics, consult your local taxing authorities.
The components of calculating property tax include the assessed value and the tax rate. Generally speaking, a home is assessed by a county property assessor, who assigns it a certain value, giving you the assessed value of a home. Then the local taxing authority sets the rate at which every home will be taxed, which is called a multiplier or tax rate. The formula for calculating property tax is:
Assessed Value x Tax Rate = Property Tax
So if a home is assessed at $100,000 and the tax rate is set at 2.4 percent, $2,400 goes to the local taxing authority annually.
However, it is important to understand that the assessed value of a home is often not the same as the price you paid for the home. Depending on your area, the assessed amount can be wildly inconsistent with how much you would make if you sold your home. For example, in Chicago’s Cook County, a property’s assessed value is ten percent of its estimated value – and its estimated value is often tens of thousands of dollars off, in part because properties are only assessed every three years.
So in Chicago, if a condo recently sold for $350,000, its estimated value may be $310,000, making its assessed value $31,000. This amount would be multiplied by the calendar year’s state-mandated equalization factor (at the time of this writing 2.7523), and that product would be multiplied by the current Cook County multiplier of 2.9160 percent, to get the amount owed for this year: $2,487.97. Whew.
But, as is probably obvious, the amount owed changes each year. This is due in part to changes in the tax rates – and in part due to changes in the assessed home value. It’s the latter where a big difference can be made.
When understanding what is a property tax, it is important to know about the property tax exemptions available. Most jurisdictions provide a discounted tax bill for individuals in certain circumstances. This is called an exemption. Here are the most common exemptions, though be sure to check with your local taxing authority for others that may be available:
If you actually live in your home (as opposed to using it as an investment property or a vacation home), you almost always get a tax break – often a significant one.
Much like it sounds, in many jurisdictions senior citizens receive special tax treatment. Occasionally, disabled citizens unable to work are eligible for a similar exemption.
If you make significant improvements to your home, the increased value of your home can often be exempt from your assessment, at least temporarily. Usually the increased value of your home is phased into the assessment over several years, so that your property taxes don’t jump all at once – over the term of the exemption, you can save thousands of dollars in taxes.
Many jurisdictions have exemptions for veterans or spouses of deceased veterans. Additionally, the Disabled Veterans’ Exemption is available in most jurisdictions and often waives your entire property tax bill.
When and how your property is assessed can vary depending on where you live. As a result, this can affect how much property tax you pay and how you consider an upcoming real estate transaction. From the examples below, knowing when and how your property will be assessed is important – it will clue you into what you should expect to pay going forward.
In California, by law, the assessed value of a property cannot increase by more than two percent per year, provided that the same owner keeps the property. But once the property sells, it can be assessed at the prevailing market rate in the first year of new ownership. So, if you’re in San Francisco during a housing boom, and you buy a home that’s increased in value by 150 percent over the past five years, expect a much bigger tax bill than the previous owner. The good news is that if your home continues to appreciate, you won’t get buried by an ever-increasing tax bill.
In Cook County, Illinois, property values are assessed once every three years, regardless of whether there’s a transaction on the property. When you buy a property, you may have the same assessed value for two more years. Depending on the market, this could save or cost you some money.
In Salt Lake County, Utah, property values are formally reviewed and assessed every five years, but the county annually looks at the sales prices for each neighborhood and adjusts its valuation for each home annually, to make sure it tracks with the market relatively closely.
If you think that the property value assessment of your home is higher than it should be, then you have the option to appeal the assessment. That said, just because you can, doesn’t mean you should. If your assessment is roughly comparable to nearby properties of the same size and type, you’re unlikely to win an appeal. But, sometimes there is a significant discrepancy between your home’s assessed value and that of your neighbors – and it’s nice to know you have recourse if that’s the case.
California is probably the most extreme example – as discussed before, the property value assessment cannot increase by more than two percent per year until the property changes hands. A few other states and localities have similar limits on the rate at which an assessment may go up, or have ‘circuit breaker’ limits that prevent owners from having to pay too large an increase in property taxes. While tax caps are very popular with voters, they’re controversial: some policy researchers believe they do not achieve their goal of decreasing the amount of tax homeowners pay.
Regardless, for your purposes, it’s important to know whether there’s a cap in your area. If there is, it can affect you both when you first buy (the property’s taxes will likely skyrocket) and once you’ve owned for a while (your taxes will be largely stabilized).
As a homeowner, it is not only important to understand what are property taxes, but how they can affect the home selling process. Keep in mind that potential buyers will need to factor in the taxes they’ll have to pay on your property. As a result, that could affect the price you set on the home.
If you’re thinking about selling your home soon, you should get in touch with a Redfin real estate agent for a free consultation on what your home could sell for in today’s housing market.