The Impact of Property Taxes on Home Buying Decisions – ZING Blog by Quicken Loans | ZING Blog by Quicken Loans
No matter where you live, taxes are one of the few sureties of life. Most of us are familiar with federal and state taxes, as well as sales tax. Depending on where you live and work, there may be local income tax in your city or town as well.
When you own a home, you pay property tax. Your home has a value that goes up or down depending on market conditions. Over the last several years, we’ve been in a cycle where property values are on the rise from year to year. Your home is taxed on its value like any other asset you have.
Property taxes pay for local city services and special projects voted for by local residents, as well as the operations of any local public school district. You may choose to buy a home in an area with higher taxes because you find the city services provided be worth it. It’s up to you.
We’ll look at how to get an idea of what local property taxes will be for the purposes of comparison. In addition, we’ll go over why there may be differences in property tax bills from one owner to the next.
Calculating Property Taxes
Property tax rates are calculated based on something called the mill levy. One mill is equal to $1 for every $1,000 of assessed taxable value.
Here’s an example. If your county had $300 million worth of assessed taxable value, it might decide it needed $3 million to run county operations and services. If you do the math, that comes out to 1% of local property tax. If the local school district decided it needed $6 million for operations, that would be another 2%, and if you could run city services for $1.5 million, that would be another 0.5% for a total tax rate of 3.5% in your area.
We’ll get into how properties are valued for tax purposes below, but for the purposes of this example, let’s say your taxable assessed value was $200,000 on your home. At a tax rate of 3.5%, your tax bill would be $7,000 annually.
It’s important to note that if you have a mortgage, you most likely have an escrow account. The idea here is to spread out the cost of your tax bill over 12 months so you don’t have to cut one big check at the beginning of every year.
If your house is paid off, you may be able to get on a payment plan with your local taxing authority.
Now that we’ve talked about how you get your tax rates and figure out a basic tax bill, let’s go over how they actually calculate the value you’ll be taxed on. This could be the actual appraised value of your home, but most of the time, that’s actually not the case.
Your actual assessment is affected by a variety of factors including:
- State law – In many cases, states limit the assessed value of your property to a percentage of your actual property value. If your state has a 75% assessed value limit, the taxable value of a $200,000 property is actually $150,000.
- Area values – Although your taxable value may be reassessed periodically, it’s impractical for your taxing authority to send an appraiser out to every house every year. Therefore, value in your area may be more about the average value.
- Limits – States may impose limits on how much your taxable value can go up. So even if your property value went up 10% and increased your assessed value by the same percentage, your state could conceivably have a limit of 2% for increases.
It’s also worth noting that not all states or municipalities reassess taxable value every year. They may only do it every third year or every fifth year. Still others only reassess value when the house changes hands.
Differences in Property Tax Bills
If you know the property tax bill of the previous owner of your home, you may assume that your property tax bill will be the same, at least until your house is reassessed. While that may be true, it isn’t necessarily the case.
You and the previous owner may qualify for different exemptions. One common tax break is what’s known as the homestead exemption. You qualify for this in many states if you use the property as your primary residence. It doesn’t apply to vacation homes or investment properties.
In some states, you may also qualify for exemptions if you have a disability or have veteran status.
If you’re uncertain of potential exemptions, be sure to contact a tax expert in order to make sure you’re claiming every exemption you qualify for.
You can also deduct the amount of your local property taxes from your yearly federal tax bill.