If you own a home or are thinking about purchasing a home, you'll have to address property taxes. They vary from state to state, are collected by local governments, and support community needs like funding for emergency services, locals schools, and city services. Let's take a look at what you're paying for and how property taxes are calculated. (For the sake of this article, values will be based on homes not vacant property.)
Property taxes, sometimes called "real estate taxes", are paid by homeowners and are liabilities which are based on assessed home values or the mill levy. Different boards, councils and legislatures determine appropriate rates and how much money is needed for various services in the community. City, county and state governments rely on the money generated from property taxes to support funding for education, transportation, parks and recreation, libraries, and emergency services, among others.
An assessor will determine the value of your home every 1-5 years. The assessed value is based on local real estate market conditions and can be performed using one or a combination of the following: cost method; income method; property tax information. A percentage of the assessed value will go towards property taxes or the mill levy may be used (varies by state).
If you don't agree with the assessed value of your home (ex. too high), you can file an appeal with your county commissioners or assessor's office. If inaccuracies are identified by the assessor's office, they can be corrected and there will be no need to file an appeal. Check with your assessor's office or board of assessment appeals board to learn more about how your county/state handles assessments that need to be reviewed.
The mill levy is your property value's tax rate, expressed as a percentage, where one mill equals 1/10 of 1 cent. In other words, for every $1,000 of assessed property value, one mill equals $1. Mill levies are not affiliated with all states.
Tax jurisdictions have different tax levies and they need to be added together to determine the total mill rate for your county. If the total of assessed property value of your county is $500 million, and the county needs $2 million in tax revenue to run the county, they would simply divide $2 million by $500 million, which equals 0.4%. In addition, say the school district needs a mill levy of 0.6% and emergency services need a mill levy of 2% to fund their needs. All levies would be added together totaling 3% or 30 mills for the county.
When & How You Pay Property Taxes
Depending on the county/state you live in, the timeline for receiving your tax bill and paying your property taxes will vary. For example, some homeowners pay property taxes twice a year and they are paid 6 months in arrears. In other words, paying for property taxes in June of this year will cover taxes for July-December of last year.
Other states send out a bill once a year and you pay it in 2 installments, meeting required deadlines. For example, in Montana property tax bills are mailed in late October and paid in 2 installments. One installment must be paid by November 30th, the other by May 31st of the next year.
When you have a mortgage you may also have an escrow account, managed by your lender, which will cover property taxes. Each month a mortgage payment is made, a small portion is set aside to cover property taxes (approximately 1/12 of your annual property tax bill). Your lender will pay your property taxes on your behalf, saving you from having to pay a hefty bill each year. Since the amount set aside in the escrow account each month is an estimate of what should cover your annual property tax bill, you may end up receiving a small refund at the end of the year or you may have to pay the difference if there's a shortfall.
In the example below, the homeowner pays for 3 property tax entities. The individual tax amounts are calculated from a home valued at $158,158. The total of their property taxes, $2,992.28, is due by 1/31/19. Penalties and interest are charged if the bill isn't paid by the deadline.
Property taxes can be confusing but by understanding assessed value and mill levy, you'll get a better understanding of how they're calculated. By paying property taxes you're helping to support local parks and recreation, emergency services, libraries and more. In addition, property taxes are deductible but there is a cap on how much can be deducted based on federal and local taxes. Property tax values can change year-to-year and there are penalties if taxes aren't paid on time. Visit your local assessor's website and enter your address to see how much you must pay in property taxes.