Pace Work. Maths. 10-D. 18.01.2021

Topic:Property tax

Study the theory block:

What Are Property Taxes?

Simply put, property taxes are taxes levied on real estate by governments, typically on the state, county and local levels. Property taxes are one of the oldest forms of taxation. In fact, the earliest known record of property taxes dates back to the 6th century B.C. In the U.S., property taxes predate even income taxes. While some states don't levy an income tax, all states, as well as Washington, D.C., have property taxes.

For state and local governments, property taxes are necessary to function. They account for most of the revenue needed to fund infrastructure, public safety and public schools, not to mention the county government itself.

You may have noticed already that the best public schools are typically in municipalities with high home values and high property taxes. While some states provide state funds for county projects, other states leave counties to levy and use taxes fully at their discretion. For the latter group, this means funding all county services through property taxes.

To get an idea of where your property tax money might go, take a look at the breakdown of property taxes in Avondale, Arizona.

You can see that Maricopa County takes a cut, as do local school districts and colleges, the library and the fire department. While this shows a specific example, you may not find the same breakdown of tax levies where you live. Your property tax bill often depends on county budgets, school district budget votes and other variable factors that are distinct to where you own property.

How Do Property Taxes Work?

Let's define a couple of key terms before we get into the details of how property taxes work. First, you must become familiar with the "assessment ratio." The assessment ratio is the ratio of the home value as determined by an official appraisal (usually completed by a county assessor) and the value as determined by the market. So if the assessed value of your home is $200,000, but the market value is $250,000, then the assessment ratio is 80% (200,000/250,000). The market value of your home multiplied by the assessment ratio in your area equals the assessed value of your property for tax purposes.

Wondering how the county assessor appraises your property? Again, this will depend on your county’s practices, but it’s common for appraisals to occur once a year, once every five years or somewhere in between. The process can sometimes get complicated. In a few states, your assessed value is equal to the current market rate of your home. The assessor determines this by comparing recent sales of homes similar to yours. In other states, your assessed value is thousands less than the market value. Almost every county government explains how property taxes work within its boundaries, and you can find more information either in person or via your local government’s website.

Another crucial term to understand is millage rates. The millage rate is the amount per $1,000 of assessed value that's levied in taxes. Millage rates are expressed in tenths of a penny, meaning one mill is $0.001. For example, on a $300,000 home, a millage rate of $0.003 will equal $900 in taxes owed ($0.003 x $300,000 assessed value = $900).

To put it all together, take your assessed value and subtract any applicable exemptions for which you're eligible and you get the taxable value of your property.

That taxable value then gets multiplied by the sum of all applicable millage rates. As you can see in the Avondale example above, each school district has its own millage rate. All the separate tax levies are added and then applied to your taxable value. The number you calculate (millage multiplied by taxable value) tells you the property taxes owed before any credits. Note that tax credits are different from exemptions and aren’t universally available. You’ll have to check with your county to see if you’re eligible for any.

These credits are subtracted from any taxes you might owe. Once you find that number, you have your total property tax bill.

How you pay your property taxes varies from place to place. Some people pay extra each month to their mortgage lender. The lender keeps that money in escrow and then pays the government on behalf of the homeowner. Other people pay their property tax bill directly to the county government on a monthly, quarterly, semi-annual or annual basis. Your payment schedule will depend on how your county collects taxes.