Understanding Property Taxes

What Are Property Taxes?

A property tax or millage rate is an ad valorem tax on the property's value, usually levied on real estate and personal property (in some states). The tax is levied by the governing authority of the jurisdiction in which the property is located. This can be a national government, a federated state, a county or geographical region, or a municipality. Multiple jurisdictions may tax the same property.

It may be imposed annually or at the time of a real estate transaction, such as in real estate transfer tax. This tax can contrast to a rent tax, based on rental income or imputed rent, and a land value tax, which is a levy on the value of land, excluding the value of buildings and other improvements. Under a property-tax system, the government requires or performs an appraisal of each property's monetary value, and tax assessed in proportion to that value.

Four Types of Property Taxes

Forms of property tax vary across jurisdictions. Real property is often taxed based on its class. Classification is the grouping of properties based on similar use. Properties in different classes such as residential, commercial, industrial, and vacant real property are taxed at different rates. In Israel, for example, property tax rates are double for vacant apartments versus occupied apartments.

A special assessment tax is sometimes confused with property tax. These are two distinct forms of taxation: one (ad valorem tax) relies upon the fair market value of the property. The other (special assessment) relies upon a special enhancement called a "benefit" for its justification.

Difference Between Property Tax & Real Estate Tax

People often use the terms property tax and real estate tax interchangeably. And it's partially true: Real estate tax is a type of property tax. However, not all property taxes are real estate taxes.

As noted above, in addition to real estate, many jurisdictions also levy property taxes against tangible personal property. According to a 2019 report by the Tax Foundation, 43 states tax tangible personal property. Both types of property are tax-deductible if you file Schedule A with your income taxes. However, since the Tax Cuts and Jobs Act, the amount of state and local taxes (SALT) taxpayers could deduct on their federal income taxes fell from no limit to $10,000 per year for either married couples or single taxpayers. Those in the married filing separately category have a $5,000 cap.

So here's the difference: Real estate taxes are taxes on real property only; property taxes can include both real property and tangible personal property.

How Does Property Tax Work?

The amount owners owe in property tax is determined by multiplying the property tax rate by the current market value of the lands in question. Most taxing authorities will recalculate the tax rate annually. Almost all property taxes are levied on real property, legally defined and classified by the state apparatus. Real property includes the land, structures, or other fixed buildings.

Ultimately, property owners are subject to the rates determined by the municipal government. A municipality will hire a tax assessor who assesses the local property. In some areas, the tax assessor may be an elected official. The assessor will assign property taxes to owners based on current fair market values. This value becomes the assessed value for the home.

The payment schedule of property taxes varies by locality. In almost all local property tax codes, there are mechanisms by which the owner can discuss their tax rate with the assessor or formally contest the rate. When property taxes are left unpaid, the taxing authority may assign a lien against the property. Buyers should always complete a full review of outstanding liens before purchasing any property.

When is Your State's Property Tax Due Date?

Most property tax assessments are done annually or every five years, depending on the community and the property’s location. After the owner has received their assessment with its property valuation, a property tax bill is mailed separately.

Assessing Property Tax

Different property types have various types of tax assessed on the land and its structures. For example, vacant land will have a significantly lower assessed value than a comparable piece of property that is improved, and as a result, it will have lower property taxes. If access to public services, such as sewer, water, and gas, the land assessment might be higher. If the assessor feels that the land has the potential to be developed, it could lead to a higher assessment and more taxes for the owner. The amount that a property is taxed comes from a percentage of the assessed value of the property.

The information the assessor has is considered part of the public record. Owners can see how much they must pay by going to the assessor’s website and entering their address. Sometimes they may be charged a small fee for accessing this material. Another option is to go to the assessor’s office in the county courthouse. Once you are at the county courthouse, you can look up the information and print out a copy for a nominal fee.

Property tax rates and the types of properties taxed vary by jurisdiction. When purchasing a property, it is essential to scrutinize the applicable tax laws.

In most Organization for Economic Co-operation and Development (OECD) countries, immovable property tax represents a low proportion of federal revenue compared to income taxes and value-added taxes. However, the rate in the United States is substantially higher than in many European countries. Many empiricists and pundits have called for an increase in property tax rates in developed economies. They argue that the tax's predictability and market-correcting character encourages both stability and proper development of the real estate.

In the United States, property tax on real estate is usually levied by the local government. The national government levies no real estate tax, nor property tax. State governments levy 3% of the total property tax collected. The other 97% is collected by counties, municipalities, schools, community colleges, and many other special-purpose governmental agencies, e.g., libraries, museums, parks, bridge authorities. Rates vary across the states, between about 0% and 4% of the home value. The assessment is made up of two components—the improvement or building value and the land or site value. The property tax is the main tax supporting local: education, police, fire protection, government, roads, and most infrastructure, e.g., sewers, bridges, street lights. Many state and local jurisdictions add personal property taxes.

Calculating Property Taxes

As mentioned earlier, every tax has its appropriate rates to find its calculation. Property taxes are calculated using the value of the property and typically given as a percentage. This includes both the land and the buildings on it. Usually, tax assessors will value the property every one to five years and charge the owner-of-record the appropriate rate following the taxing authority standards. Assessors calculate that value using the millage rate, called the “mill rate,” or “mill levy”–and the assessed property value.
Therefore the millage rates and tax rates are usually $1,000 or $100 respectively of a property's assessed value. The authority multiplies the assessed value by the mill rate and divides it by 1,000. For example, a property with an assessed value of $50,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of $1,000 per year.