A home is taxed on its value, and property taxes go towards funding community amenities, school districts, and local projects. Property taxes can vary widely between states and even between municipalities adjacent to one another.
Part of the whole process of buying a home means taking property taxes into account, as property owners may have to pay a considerable amount in property taxes on certain homes every month. Investors in real estate need to understand what property taxes they will have to pay if they want to determine what they can afford before they even start looking for houses to invest in.
Mill levies
Property taxes are calculated on what’s called a mill levy. A mill is equal to a dollar for every $1,000 of assessed taxable value. The mill levies in different areas vary considerably depending on the public amenities in the area. Calculating property taxes involves multiplying the assessed value of the property by the mill levy. For a home assessed at $200000, the tax bill would be $6,000 annually if the mill levy was 3%.
If a town has $350 million of assessed property value and its annual fiscal budget is $3.5 million to cover its operations, this means 1% of the total assessed property value is needed to run it. The homeowners’ tax bills should be 1% of the values of their homes.
Property management services like Evernest, Dorman and Timberline will help investors to evaluate what properties are worth buying as managers have experience in local markets. They will help landlords with smooth property management services in Colorado Springs and many other areas in the U.S.
Assessed property value
Property has a market value that depends on market conditions at the time, but when calculating property taxes, it’s the assessed value of the property that is taken into account. When tax assessors calculate this value, they often use a combination of different methods, such as looking at comparative sales, replacement costs, and whether a property is bringing in an income for the owner. Working with quantity surveyors Sydney experts will provide you with a tax depreciation schedule to maximise your returns on your property.
The assessed value is usually lower than the market value. States will often limit a property’s assessed value to a percentage of the actual property value. For example, if a state’s assessed value limit is 80%, a $400,000 property has an actual taxable value of $320,000.
Taxable value is reassessed periodically, but it’s impractical to send out tax appraisers to houses every year, so value in the area may be more about the average value. In most cases, a home’s value will only be reassessed every third or fourth year.
Keeping a property tax calculation in mind when budgeting for a home purchase means buyers can already have a price range in mind when getting pre-approved.
Uses of property taxes
Property taxes fund many services and initiatives such as community pools, law enforcement, road works, libraries, fire protection etc. These services can attract investors to buy homes in some neighborhoods over others. Safe neighborhoods free of crime and good school districts are strong attractions for families. It seems fair that these services are funded by taxing current homeowners.
Differences in property tax bills
Knowing the property tax bill a previous owner of a house is paying does not necessarily mean a subsequent owner will pay the same amount. Homeowners may qualify for different exemptions.
A common exemption is a homestead exemption which owners can qualify for if the property is a primary residence. It doesn’t apply to investment properties or vacation homes. In some states, individuals with disabilities, senior citizens or veterans qualify for exemptions. Working with a tax expert can help homeowners to understand what exemptions they may qualify for. Property tax exemptions may reduce property taxes but don’t usually eliminate them. Moreover, learning the steps for a successful property tax protest can potentially reduce your tax burden and ensure you maximize the return on your investment.
Other factors to take into account
- Property taxes in certain areas have been on the rise year to year. Buyers considering buying a home in these areas have to take into account that their property taxes are likely to increase, especially if they make home improvements.
- A home’s value can go up and down depending on re-assessments, changing market conditions and other factors.
- The mill levy can change if the local government decides to undertake certain projects, such as opening a new school or refurbishing a fire station. It needs to raise its budget to do so, and the tax rate will go up.
- Buyers who feel as though their property taxes are too high can ask for an appraiser to visit the home and reassess its value. They can file a property tax grievance which is a formal complaint, if a re-assessment confirms what they feel.
Homeowners can deduct a portion of their local property taxes up to $10,000 from their yearly federal tax bill.
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