How Do Property Taxes Work?
It might not be the first thing you calculate into affording a new home, but property taxes are something you’ll have to contend with at some point. And when the time comes, you’ll probably have quite a few questions. How do you estimate property taxes? Do sellers pay property tax at closing? And how do property taxes work, exactly? What do they help support?
Here’s a quick guide to property taxes and some tips on how to figure out what you might have to pay.
What are Property Taxes?
Why do you have to pay property taxes anyway? Property taxes can seem like a frustrating added expense on your mortgage, but they aren’t all bad. And in some ways, your property taxes going up can be a good thing. The money collected from property taxes helps support the local community and schools in your area. It might also go to things like infrastructure and other public projects.
How Do Property Taxes Work?
Property taxes are calculated based on the assessed value of your home. A new assessment is calculated every year, which may mean that the cost of your property taxes fluctuates year to year. Of course, most people aren’t excited by having to pay more when taxes go up. However, your taxes going up isn’t necessarily a bad thing. Yes, it means you have to pay more. But it also means that the home values in your area are going up.
You want your property to at least maintain its value or increase every year—it means you made a wise investment in the first place. Home value is determined both by the assessed value of your home, as determined by a county assessor, and the overall market value.
How to Estimate Property Taxes
There are several ways to get a quick estimate of what property taxes might be on any given property. If you’re looking at an existing home for sale, the listing page typically shows what estimated annual taxes are. Or you can look up the average county tax rate in your area and use the estimated value of your home.
If your estimated home value was $225,000 and the average tax rate was 2.1 percent, you’d take 2.1 percent of $225,000 to get $4,725. You would owe that $4,725 annually, but your mortgage company would probably pre-collect it monthly. That means that you’d pay about $393 a month for taxes, on top of your monthly mortgage.
Do Sellers Pay Property Tax at Closing?
Both the seller and buyer might pay some property taxes at closing. In a buyer’s market, the seller might cover what is traditionally owed by the buyer. Or in a seller’s market, the buyer might offer to cover all of the property taxes due by both parties. This is to increase incentive on the purchase or sale.
At closing, property taxes are prorated. If your closing date is May 5th, the seller is responsible for the property taxes due up to May 5th. The buy is responsible for property taxes past that date. You can get an estimate for what you might owe by using the number you calculated above and dividing it by 30 to get the daily tax cost. Since May has 31 days, you would deduct five from 31 to get 26. Multiplying 26 by your daily tax cost, in addition to the remaining months of the year would give you a rough estimate of how much you would owe as a buyer.
Property Tax Deductions
As a homeowner, you can deduct property taxes on your tax return if you itemize your deductions. This amount is limited to $10,000 per year. However, since the standard deduction was doubled in 2018, fewer and fewer people have chosen to itemize their returns.
Understanding how property tax is calculated isn’t too difficult and while it might seem confusing at first, figuring out how property taxes work can help you better understand your investment and how much it’s truly worth. Of course, it’s never thrilling to add up the monthly expenses of homeownership. But don’t forget that your home is an investment in more ways than one, including the opportunity to make property tax deductions.
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