Property Taxes
Property taxes are an annual charge homeowners and corporations with real estate pay to local, state, or federal governments as per the law. Also known as ad valorem tax, they are a percentage of your home’s value, real estate, or immovable possessions such as land and buildings.
They are regressive taxes because they remain at the same rate each year, regardless of the owner’s income, which can affect low-income earners. You are obliged to pay the taxes to your state or municipality as long as you are a homeowner in the country.
Property taxes vary from one state or county to another, depending on the jurisdiction. They are a small percentage of the revenue the federal or local government collects for facilitating developments and public services for the public. They help build and maintain public schools, hospitals, police departments, infrastructure, and other local services.
Since these taxes are mandatory, it is essential to understand how they work before buying immovable or movable property in any state within the country. This guide will break down the critical aspects of property taxes, including how they’re determined, what factors influence them, and strategies for managing your property tax bill.
What Are Property Taxes?
Property taxes are the compulsory charges imposed on residential, commercial, or real estate owners by federal or local tax authorities. Property, in this case, implies immovable or movable tangible personal possessions. Depending on the current market value, commercial and residential property owners pay different taxes.
The property taxes are based on the assessed value of your properties, including tangible personal properties such as vehicles, buildings, lands, equipment, boats, private jets, and other structures.
You will pay taxes on primary residences, land, commercial property, rental or business premises, and second homes. Property taxes account for around 30 percent of the total revenue that the country collects, or 70 percent of the local government collects to fund public services that include roads, schools, fire departments, and public medical services.
Types of Property Taxes
Real Property Taxes
These taxes apply to all immovable properties, especially land and structures such as condos, homes, and structures you own. They are more neutral, stable, and transparent based on the stipulated state tax rate and the assessed property value.
You can get your state’s property tax rate and calculate your immovable property bill early enough to help you prepare to pay the taxes on time. The immovable or fixed property taxes exclude one-off taxes on realized capital gains, transfers, or annual wealth taxes. They have existed for the longest time and are among the most straightforward and understood taxes.
Tangible Personal Property Taxes
You can also pay taxes on movable properties, including automobiles, machines, furniture, and equipment. They are complex and nonneutral taxes, with high compliance costs, different from the neutral and transparent immovable property taxes.
Tangible personal taxes make businesses expensive because of the high tax burden that can distort investment decisions because they can hinder economic growth, especially for businesses.
State Property Tax Rates in the Country
Below is a comprehensive snapshot of 2023 property tax rates for single-family homes across the nation.
States With the Highest Property Tax Rates
| State | Effective Property Tax Rates |
|---|---|
| New Jersey | 2.23% |
| Illinois | 2.08% |
| New Hampshire | 1.93% |
| Vermont | 1.83% |
| Connecticut | 1.79% |
| Texas | 1.68% |
| Nebraska | 1.63% |
| Wisconsin | 1.61% |
| Ohio | 1.59% |
| Iowa | 1.52% |
States With the Lowest Property Tax Rates in the Country
| State | Effective Property Tax Rates |
|---|---|
| Delaware | 0.61% |
| Nevada | 0.59% |
| West Virginia | 0.57% |
| Utah | 0.57% |
| South Carolina | 0.57% |
| Louisiana | 0.56% |
| Wyoming | 0.56% |
| Colorado | 0.55% |
| Alabama | 0.40% |
| Hawaii | 0.32% |
Calculating Property Tax
Township assessors, local officials, county collectors, and local boards of review in a county or state are responsible for calculating property taxes for residential and commercial property owners. They calculate the property taxes using the stipulated rates. The assessors evaluate your property’s value every first day of every year, calculate the tax bills, and distribute the payments to local taxing districts.
The tax rate is subject to change annually, depending on the state or municipal government or the current market value. Here is a formula for calculating property taxes for residential property owners.
Property tax = Property’s current market value * the state’s effective tax rates.
For instance, if a homeowner in South Carolina whose current property value is $1,000,000 pays a property tax of 0.57% * $1,000,000 = $5,700 annually. Another homeowner with the same property value in New Jersey will pay $22,300, a considerable difference of more than $16,600.
Property-Tax Exemptions
Some homeowners can qualify for an exemption from paying property taxes. The exemptions can relieve you from tax burdens by lowering the amount you must remit to the local or federal government. The Internal Revenue Service (IRS) laws offer the following exemptions for homeowners to reduce their property taxes.
Homestead Exemptions
A homestead exemption to property taxes is for homeowners who have lost a spouse. It protects you from creditors and property tax obligations after you declare yourself bankrupt. You can only get the exemption on your primary residence, implying it does not apply to commercial properties or second homes. The rules for the homestead exemptions differ from states or jurisdictions.
To qualify for the homestead property tax exemption, you should be a surviving spouse, which provides financial protection and prevents the loss of their primary residence. You must also file a claim to be exempted. Otherwise, you will not get one even if you qualify.
Most states offer the homestead exemption to homeowners who have a disability, are seniors, veterans, or law enforcement officials. Some states that do not have homestead exemptions for homeowners include Pennsylvania and New Jersey.
A Property-Tax Circuit Breaker
Another common exemption for homeowners is the circuit breaker program, as it depends on your income. If your property tax bill exceeds your income, you should ask for a reduction of the property taxes. It determines your ability to pay the taxes, making the property taxes more affordable for eligible homeowners.
It protects families from unreasonable taxes that can affect their livelihoods. Seniors, disabled individuals, and low-income individuals can qualify for the circuit breaker property tax break unless they are from Texas, Mississippi, Arkansas, South Carolina, and Kentucky, which do not offer it.
Factors Affecting Property Taxes or Mill Rates for Homeowners
Many aspects can affect your property tax bill upwards or downwards.
Municipality Needs
Local tax authorities can influence the tax rate according to the funds needed to run the county or state. They can increase or decrease your mill rate by lowering or hiking the annual property tax rates.
The authorities use needs in public organizations such as public schools, libraries, fire services, roads, community colleges, parks, and police departments to determine your property tax bill. They ensure that the property taxes they’ll connect will facilitate public services.
Some states review their mill rate annually, while others only consider a change when you are selling or buying property or after every three years.
Property Size
The amount of property tax bill you pay the local or state government depends on the property size. Large properties with high value tend to be more expensive than smaller properties.
The municipality’s assessors use the land’s square footage during the assessment stage to determine its current market value, calculate its tax bill, and send the bill to the local taxing districts. Some jurisdictions use progressive tax rates to allocate large properties to higher tax brackets and vice versa.
Property Value
Local officials or township assessors visit your immovable properties to evaluate them when finding the market value. They check for new improvements or additions on your property to gauge your home’s value for calculating the taxes.
The county collectors or local board of review considers the land value, new market trends, and the cost of your home improvement during the special assessments. An increase in your property’s value makes the property taxes surge, but a drop in the value lowers your tax bill.
Location
Since all the states have diverse property rates set by the municipality or state, your location determines your property taxes. Some high-end locations have expensive properties that attract higher property taxes because of their high market values.
Counties, towns, and cities with high public needs can set their property taxes higher than those with less public spending needs. Some jurisdictions, such as New Jersey, have high property tax rates at 2.23 percent, while others have low at 0.32 percent.
Property Tax Exemptions
Another vital aspect that affects property taxes for homeowners is exemptions. The common Fixed-property tax exemptions that lower your tax bills include homestead, circuit breaker programs for seniors, and tax deferrals that reduce the annual property tax for eligible homeowners. The more exemptions, the lower the taxes; the reverse is true.
Age of the Home
Homeowners of older houses with outdated features can qualify for lower property taxes because their homes have decreased value. These houses have low value because they need renovations of almost everything to upgrade to the fancy, and most homes have efficient and modest systems and fixtures.
On the other hand, homeowners with new homes with all the amazing market trends can have high property values after an assessment and have to pay higher taxes.
How to Lower Your Property Taxes
Reducing property taxes requires a deep understanding of taxes and how the assessment is done. You need your property tax card that indicates your lot size, room’s dimensions, any improvements, and the type of fixtures in your home. The card can help you find any discrepancies that could make your property taxes high to help you make a timely appeal.
Another way to reduce property taxes is by avoiding any home improvements or building structures before your property’s assessment to prevent increasing its value and taxes.
Consider a RenoFi loan for renovations or home improvements after your property’s comprehensive evaluation to keep taxes low. In addition, it is wiser to allow the assessor to inspect your home to assess everything in it and assign a value rather than restricting access, which can cause the local assessor to assign you a high assessed value that can increase your property taxes.
Another way to reduce property taxes is to ensure you are present when the assessor evaluates your home to prevent mistakes that can skyrocket your home’s value and property taxes.
Applying for exemptions available in your state can give you tax cuts or removal, especially if you have lost a spouse, are considered bankrupt, are a senior, a veteran, or are living with a disability.
RenoFi Loans on Property Taxes
When it comes to financing home renovations, RenoFi loans offer a unique and advantageous solution. Unlike traditional home equity loans or lines of credit (HELOCs) that rely on your home’s current value, RenoFi loans use the after-renovation value of your property to determine your borrowing power. This can significantly increase the amount you can borrow, making it easier to fund large-scale renovation projects.
For example, imagine your home is valued at $500,000 with an outstanding mortgage balance of $400,000. You plan to undertake a renovation that you expect will increase your home’s value to $640,000. With a traditional loan, your loan-to-value ratio (LTV) might limit your borrowing capacity to zero, as you’re already at an 80% LTV. However, a RenoFi loan could allow you to borrow up to 90% of the after-renovation value, giving you access to up to $176,000.
This makes RenoFi loans an excellent choice for homeowners looking to finance major projects like adding an ADU (Accessory Dwelling Unit), upgrading a kitchen, or expanding living spaces. By leveraging the future value of your home, RenoFi loans provide the financial flexibility needed to complete renovations that add significant value to your property.
Get started with your RenoFi loan hereNavigating Property Taxes With Confidence
Understanding property taxes is crucial for homeowners who want to manage their finances effectively. By knowing how property taxes are calculated, the factors that influence them, and strategies to lower your tax bill, you can confidently navigate the complexities of property taxes.
If you’re considering a home renovation, RenoFi is the smartest way to finance your project. Unlike traditional loans, which are based on your current home value or require you to refinance your primary mortgage, RenoFi loans are based on the after-renovation value of your home. This allows you to borrow more, get a low monthly payment, and keep your low rate on your first mortgage. Get started with your RenoFi loan today and make your home renovation dreams a reality.
