How are Property Taxes calculated?

Property taxes may not be high up on your list of expenses when contemplating a home purchase, but they should be part of your calculation. Property taxes are highly variable and can be impacted by a number of factors, including location and home value.

The good news is that for most types of real estate, you can deduct property taxes on your income tax return, along with interest paid on your mortgage. You can deduct property taxes for

  • Your main home
  • Vacation homes
  • Land you own
  • Foreign property

You can’t deduct property taxes for

  • Property you don’t own
  • Rental property or business property (though you can claim it as an expense)
  • Local improvements, like streets or sidewalks
  • Trash collection, library taxes, or anything else not directly related to the value of the property itself.

If you own a co-op, you can only claim your share of the amount paid by the corporation. If school taxes in your area are based on the assessed value of your property, you can deduct those as well.

Property taxes are calculated using the Mill Levy or Millage Tax Rate. The Mill Levy is a rate wherein one mill represents one tenth of one cent. So one mill equals one dollar for each $1,000 of assessed property value. Tax levies for each jurisdiction are calculated, then all levies are added to determine a mill rate for an entire area. City, county, and school systems also have the ability to levy taxes against properties within their boundaries. These then are added to the regional rate to calculate the total levy.

To give an example, imagine an area has $100,000,000 in total assessed property value. The county’s budget is $1,000,000, so the taxes needed would be divided by the total value of the property. One million divided by 100 million equals 1% so that would be the county’s levy. Then the city and schools each decide to levy for their expenses–.5% for the county, 3% for the schools. The total mill levy for that area would be the combination of each of the levies—4.5%.

Now, imagine the market value of your home is $250,000. The assessment rate in your area is 8%. That yields an assessed value of $20,000. Multiply that by 4.5% and the tax due would be $900. Since taxes are paid twice each year, you would pay $450 every six months.

If you are a resident of DC, you can find a property tax calculator here. For Virginia, find your calculator here. The Maryland calculator is located here.  You will see considerable variability from zip code to zip code, even within the same state.

If you have a mortgage on your home, your property taxes are part of your monthly payment. They are then held in escrow by the mortgage company and paid to the taxing authority twice a year. In DC, property taxes are due March 31 and September 15. If you bought your home for cash or have already paid it off, you will need to pay the property taxes yourself. Payment information for DC can be found here.

If a homeowner does not pay property taxes on time, penalties accrue and can become quite expensive. The penalty is 10 percent of the tax and the interest is 1.5% for each full or partial month your payment is late. The city sells many of their tax debts each year to companies who then charge even more and, eventually, foreclose on the home to satisfy the debt.

Looking to reduce your tax burden? When you receive the assessment from the county, be sure to check it thoroughly for errors. Did they use truly comparable properties when determining the value of your home? Did they credit you with more bedrooms than you actually have? There are a variety of areas that might allow you to successfully argue for a lower assessed value, which translates into a lower tax bill. Need help? Some real estate attorneys take property tax appeals on a contingency basis. They will then charge you a percentage of your first year’s savings if you win.

Individuals who are 65 or older or disabled persons may qualify for a Homestead Exemption. The home must be their primary residence and they must be US citizens. If you are a younger Buyer purchasing a home from a senior citizen, be aware of this difference and don’t expect your property taxes to be the same as the former owner’s if they were claiming the Homestead Exemption. In some cases, property taxes can be reduced by as much as 50 percent with a Homestead Exemption, so find out what the cost will be for your particular circumstances.

Ready to start crunching numbers? Contact us at Eng Garcia Grant to start your home search. We have all of the information you need to make sure you go into your home purchase well informed and ready for the process.

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