What to Know About Property Taxes When Buying a Home

In the United States, most homeowners pay property taxes for homes that they own. Depending on the particular state and location, property taxes and be a large yearly or monthly amount for the homeowners budget. But what are property taxes, how are they paid and determined?

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.

What Is the Purpose of Property Taxes?

City, county, state, and federal governments all rely on taxes to function. At the local and state level, taxes help to pay for salaries of public sector employees, like teachers and firefighters. Property taxes provide a significant portion of the tax money various government organizations need to run. Specifically, property taxes can be used to pay for schools, roads, capital improvements to the area, and more.

How Are Property Taxes Determined?

Property taxes are often set by the county. This means that the annual property taxes for a home in one area might be dramatically different from a similar home in another county or state. Home buyers should factor in local costs before considering buying a home in a specific area, particularly if that area is known for high property taxes.

Every so often, at a frequency designated by officials in the area, the home will receive an assessed value. This period might be as often as once a year, or as little as every five years. The region sets a percentage of the assessed value to be paid in annual property taxes. The assessed value is quite variable, and may not relate closely to its actual market value. For example, some areas calculate property taxes off an assessed value that is only 10 percent of the property's estimated market value. However, in other areas, assessed values are a good approximation of fair market value.

Once the assessed home value is determined, officials multiply the assessed value by the percentage for the area to get an individual home's property tax total.

Property taxes are usually paid on an annual basis. Homeowners that have a mortgage usually have an escrow account where the annual property tax amount is divided by 12 months and added into the total house payment. Once due, the mortgage service company then pays the taxes from the monies in the escrow account. Homeowners that do not have a mortgage usually pay property taxes annually, though many areas have different payment plans (two or more installments) that homeowners can take advantage of.

Do Property Taxes Affect Buying Power?

Although homeowners pay property taxes once a year, the way that they are paid could vary. Homeowners with a mortgage usually pay property taxes into an escrow account with their monthly mortgage payment. Since they are usually put into the mortgage payment, the amount of monthly property taxes can affect a home buyer's purchasing power.

Home buyers are typically constrained by the maximum monthly mortgage payment (escrow included) that they can afford, in relation to their income and other debts. The property tax bill could take up a significant portion of the payment, depending on the taxes in the area. For example, a home with property taxes of $2,400 would require a $200 a month escrow payment. A property with a tax bill of $7,200 a year would translates into $600 per month. It's not unusual in high property tax states and areas, for the escrow payment to be a large part of the monthly house payment.

What Are Property Tax Exemptions?

There are ways that homeowners can lower their property tax burden, outside of buying in an area with low property taxes. Methods of lowering ones property tax bills are referred to as “exemptions.” Common property tax exemptions include:

• Homestead, for a homeowner's primary residence
• Senior/Disabled, for people who meet certain requirements
• Veterans
• Renovations, to allow homeowners a temporary reprieve from an increase in taxes
• Energy Efficient Upgrades

Taking advantage of available exemptions helps homeowners to cut down on the taxes they have to pay. Homeowners should check with their local tax assessors office to see what exemptions may apply to them.

Are There Tax Deductions for Property Taxes?

Changes to the tax code for 2018 and afterward mean that homeowners may have to research the tax deductions they can make. In the past, homeowners with a mortgage would commonly itemize their deductions instead of taking the standard deduction. Itemizing deductions allows people to claim mortgage interest and property taxes as a tax deduction. With the increase in the standard deduction, many people may choose not to itemize. Homeowners who itemize will be allowed to claim as much as $10,000 of their property taxes on their federal returns.

Understanding property taxes is an important task for home buyers. Property taxes represent a significant part of the mortgage payment, influencing how much a home buyer can qualify for in a mortgage. Most Hesperus real estate agents are well versed in property tax rates and assessments within the areas in which they serve. Before searching for a home, check with a real estate agent to determine how different property tax areas compare with each other.

For informational purposes only. Always consult with a certified tax expert before proceeding with any real estate transaction.