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What is Property Tax

Property taxes are taxes based on real estate. The tax is based on the value of the property you own and calculated by local or municipal governments. The taxes paid are used by municipalities to repair roads, build schools, and other similar services. Property tax rates and the property considered to be taxable vary in different states and municipalities. It is important for individuals and businesses to carefully examine the tax laws of the area before purchasing property.

Almost all property taxes are imposed on real property including improvements made to the land that will increase the real estate value. Most times, taxpayers will pay the tax bill without giving it a second thought. It is important to know how property taxes are calculated and how property values are determined so you know you are not being overcharged.

Assessing the property value

The assessed value is a yearly estimation used to decide the realistic market value of your property based on local real estate market conditions. Property taxes are assessed by multiplying the mill levy by the assessed value of your property. The assessor will take into consideration the real estate’s surroundings to make an estimate of overall value. The assessor will also consider the following to make an accurate assessment:

  • What similar properties are selling for under current market conditions
  • How much the replacement costs of the property will be
  • Maintenance costs for the property owner
  • If improvements were made
  • Amount of income you are making from the property
  • Amount of interest charged to purchase or build a property like yours

Once the assessor gathers the information, there are three ways your property can be valued.

Sales evaluation

The value of your property will be assessed based on the sales in the area. It is important to look at overpricing, underpricing, and the location and overall state of your property.

Cost method

The assessor uses the cost method to determine how much it would cost to replace the property. An assessor will figure the amount of depreciation which has taken place on a less than new property and how much it would be worth if it was empty.

Income method

This method bases the property value off the income you would make it if were rented. The assessor will consider factors such as costs to maintain and manage the property, insurance, and taxes. Once the market value is decided, the assessed value is the market value multiplied by an assessment rate. After establishing the assessment rate, it is then multiplied by the mill levy to determine taxes due.

Determining property tax

Property tax is determined by councils, boards, and legislatures. A hearing is held to decide the amount of money that will need to be raised so the government can cover its expenses without financial challenges in the coming year.

Calculating property tax

Property taxes are calculated using the mill levy and the assessed property value. The mill levy is calculated by determining the revenue each taxing jurisdiction will need for the next year. Divide the expected amount by the total value of property within the area. Add the rate from each jurisdiction to find the mill levy. The total is the tax rate levied on your property value with each mill representing one-tenth of a cent.

Failing to pay property tax

A tax deed is a legal document that gives ownership of personal property to the government when the property tax is not paid. The government will be allowed to sell the property to collect the late taxes. Tax deed sales are done at auctions where the minimum bid is the back taxes and fees. The title will be transferred to the purchaser. To get a tax deed, the government must go through the following legal steps:

  • Notify the property owner
  • Apply for a tax deed
  • Post a notice on the property
  • Post a public notice

Steps may vary per local government.

A tax lien foreclosure is when property is sold resulting from the owner’s failure to pay their tax liabilities. First, a statutory lien is placed on the property of the person who did not pay tax on it. Then the government that is owed the taxes will repossess the property. Tax liens can be against specific property or all the property of the taxpayer who failed to pay. Tax laws do not allow the person who failed to pay to bid at the auction.

Reporting personal property tax

Personal property taxes, also known as ad valorem taxes, are state, county, and city imposed. An example of this would be the tax imposed on the value of a car. Each jurisdiction can include different types of property in the tax assessment. Some counties consider personal property anything tangible you own that produces income. This includes tools, furniture, and equipment used in a business, and furniture used in rental homes.

Each state has a specific form for you to report your personal property tax. In some jurisdictions, you will be required to report all your personal property and their market value. Most jurisdictions will allow you to deduct most of your personal property each year. Ask a tax Expert how to report your personal property tax.

Deducting personal property tax

If you pay personal property tax to your local government, you can claim a deduction for it if it meets Internal Revenue Service (IRS) requirements:

  • Ad valorem tax must apply to personal property you own
  • Ad valorem tax must be based on the value of the personal property
  • Must be charged annually

In addition to meeting the IRS requirements, you must be eligible to itemize. If the total of your eligible deductions such as medical expenses, charitable contributions, and interest payments are more than the standard deduction you can claim, you are eligible to itemize. The part of vehicle registration fees that is based off the value of the property can be deducted. The other part would not. Personal property taxes imposed on business equipment and furniture can be deducted as a business expense. This deduction would be made on the tax return for the business on Schedule C.

If a taxed personal property is used for personal and business use, the business portion is deducted as a business expense and the personal portion as a personal expense. The business deduction will be on Schedule C and the personal deduction will remain on Schedule A. It is a good idea to keep record of personal property tax paid each year. If you need help determining your property tax, ask a certified tax Expert. 

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