Property taxes are a primary source of revenue for many local governments. They're also a significant expense for homeowners, year in and year out. Even after you've paid off your mortgage, property taxes remain. That's why it's so important to understand your property tax bill. If you know how it's calculated, you'll have an idea of what your bill should be each year. Then you can budget accordingly, avoid ugly surprises and spot any costly errors on your bill.
IN PICTURES: Top 10 Solutions For A Big Tax Bill
How are Property Taxes Calculated?
Your property tax bill is based on the assessed value of your property, any exemptions you qualify for and a property tax rate.
The assessed value of your property is determined on a certain date. In many jurisdictions, the value is assessed annually. In some jurisdictions, however, it's done every other year, only when the property is transferred or on another schedule. In some areas, the assessed value is the market value; in other areas, the market value is multiplied by an assessment rate to determine the assessed value.
Exemptions might include a decrease in the assessed value of your property if you are an owner-occupant (sometimes called a homestead exemption). The decrease in your property's assessed value says nothing about the actual market value of your property, but it does help lower your tax bill.
The property tax rate, also called a multiplier or mill rate, is a percentage (expressed in decimal form) by which the assessed value of your property is multiplied to determine your tax bill.
Property taxes pay for things like public schools, community colleges, libraries, local government employees' salaries, parks and recreation, sanitation, sewer, police and fire protection, roads and other local needs such as mosquito control. Each of these items can have its own percentage rate that is multiplied by the assessed value of your property to determine a portion of your bill. The taxes you owe for each item are totaled to determine your final property tax bill.
What Affects Your Property Tax Bill?
In addition to the assessed value of your property, your bill is based on what your property is used for (residential, agricultural, apartment, office, commercial, vacant land and so on). Some uses, like land and buildings used for religous or spirititual purposes, may be exempt. Different uses may be taxed at different rates, but taxation should be at a uniform rate - that is, the multiplier should be the same for all properties in the same category. Within that category, factors such as your property's size, construction type, age and location can affect your tax rate.
If property tax bills are based on current real estate values in your area, you can expect differences in your bill from year to year. Even if your bill is not affected by the market value of your property, it can still be affected by changes in the tax rate for any component of the property tax.
Tax authorities can increase your bill by increasing the assessed value of your property and/or by increasing the tax rate. Likewise, they can lower your bill by decreasing the assessed value of your property and/or by decreasing the tax rate. (To learn more, see How Property Taxes Are Calculated.)
The Current Real Estate Market Effect
Property taxes are determined differently in each jurisdiction, but here are some issues that are affecting owners' property tax bills this year.
In Denver, Colorado, Jason A. Letman, president of Consultus Asset Evaluation, says "most of my clients' property taxes have increased this year versus last year. The tax bill received in January was based on the 2009 valuation of the property, which confusingly has an appraisal date of June 30, 2008. In Colorado, properties are only reappraised in the odd years, so 2010 taxes paid in 2011 will be just as high."
Innkeepers Eric and Gwen Higgins of the Jefferson Inn in Jefferson, N.H., said, "Because New Hampshire has no sales tax and no income tax, property tax is the state's No. 1 source of revenue. The market and economy in general have affected us because of less other revenue such as home sales transfer tax, meals and rentals tax, vehicle registrations, etc. This has caused a deficit in the state budget, which means higher property taxes."
The Bottom Line
Remember, property taxes are one of the most crucial bills to pay. You'll have to pay interest and penalties if you're late. If you don't pay, you could lose your home. Some areas offer assistance to special groups such as veterans, welfare recipients, the disabled, the blind and the elderly. Also, if your property is severely damaged or destroyed, consult your assessor's office to see if you are eligible for tax relief.
Property tax laws are set at the local level and can vary significantly depending on where you live, so the information in this article is only meant to give you a general idea of what to expect. If you need help deciphering your property tax bill, many tax jurisdictions have sections of their websites that explain it section by section. If you disagree with your property tax bill, check with your local tax authority on how to formally request a reassessment. (For more, check out Five Tricks For Lowering Your Property Tax.)
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