Being a homeowner isn’t all sunshine and rainbows, as most millennials already know from watching their favorite sitcom characters fight over rent or attempt (and hilariously fail at) a home repair. But there are many other realities that sitcoms don’t show because they have no comedic potential whatsoever. If you’re a millennial interested in owning a home, real property tax is one of those harsh realities that you’ll have to come to terms with.
What is Real Property Tax?
The real property tax is a tax that the local government imposes on any landowners that fall within its jurisdiction. By simple virtue of owning a property within a certain area, people are obligated to pay the city, county, district or whatever form of local government covering that area a certain amount of money.
If you’ve got some awareness of local politics and urban geography, you may note that certain types of localities can overlap with others, like how a school district can be within a county. That’s actually pretty important, and you’ll learn why later. For now, you need to know that property tax is an ad valorem tax—it’s calculated by taking a property’s market value by a certain tax rate.
Does It Apply to Me?
Before you go and tweet about how you’ve got to add property tax to your #Adulting problems, you should know that it may or may not apply to you. It all actually depends on who actually owns the property and land. So if you live in and own a house, then it’s pretty clear that you have to pay the tax.
If you live in an apartment or condo, chances are you’re renting it. In that case, you don’t owe a cent of real property tax; it’s your landlord, the owner and administrator of the property, who does. The same applies if you rent the place and sublet it or have it listed on AirBnB, because ultimately, the property isn’t yours. Saying that, any landlord with an ounce of savvy should have the cost of the property tax factored into the rent, effectively passing it down to tenants like you.
How is the Tax Rate Determined?
So let’s assume you have to foot the bill. To avoid paying too much, you’ve got to know how to compute for real property tax, and it all starts with the tax rate (it’s also called the “mill levy,” in case you want to impress people).
The property tax rate is like the value of a property in Monopoly: it really depends on location, location, and location. And even within the same jurisdiction, there may be different rates applied, depending on the type of property you have and its value. Within a certain jurisdiction, commercial properties like shops and restaurants can be charged a higher tax than high-income apartments, which have to pay a higher tax rate than residential homesteads, which in turn have a higher tax rate than low-income apartments.
Remember how we mentioned before that certain jurisdictions overlap? Here’s where that comes in. The tax rate charged by a certain school district may differ from the tax rate charged by a county. And if a certain property lies within the boundaries of both the school district and the county, the tax rates for those two different jurisdictions have to be added up. This has to be done for all local jurisdictions that a property happens to be in. Once you’ve totaled those, you’ve got your property tax rate.
How is the Assessed Value Determined?
The next key to understanding real property tax is to know how your property’s assessed value is determined. Determining the assessed value typically requires two pieces of information: the property’s market value and the assessment rate. To determine the market value of a property, you can use different approaches. Typically, home property valuation would be done through either the sales comparison method or the income capitalization method.
Under the sales comparison method, the market value is taken as the cost you’d pay if you had to replace your property. In other words, it’s the sale price of a similar piece of property that has been recently sold, usually decreased to account for your home’s depreciation.
On the other hand, the income capitalization method takes the amount of annual rental income expected from the property, subtracts expenses like repair and maintenance costs and insurance, and multiplies the difference by a capitalization rate to get the market value.
Once the market value is determined, it’s multiplied by a certain assessment rate dictated by the tax jurisdiction that your home falls within, which has to be below 100%. The product of the market value and the assessment rate is the assessed value.
Is There a Way to Ease the Pain?
Multiply the property tax rate by the assessed value of your property, and you’ll get the amount of real property tax that you have to pay. The final figure will likely come as a shock to you and your bank account. So what can you do to lighten the sting? Well, there are a few things.
The simplest is to arrange for an early one-time payment of your annual property tax. Typically, paying it off at once and as soon as possible will entitle you to a big discount, courtesy of a government that wants to get that sweet, sweet revenue as soon as possible.
If the assessment of your property’s value was done by a government tax assessor, and you think they overestimated your home’s value, you can contest the appraisal. The appeal process differs between localities, but the basic point is to check the assessor’s work; you may find that they made a mistake. Once you’ve built and presented your case, the local assessor’s office can review it and might rule in your favor.
One more question: Are there any exemptions that you could apply for? Some jurisdictions may offer breaks for certain groups of people who need it, like senior citizens, war veterans, government employees, families or low-income individuals. Of course, you’ll need to submit proof and a bunch of other requirements to a government office to become eligible.
Yes, it’s a hassle, but you sometimes just have to fill out forms and fall in line. Welcome to adulthood. Feels a little like school, doesn’t it?
So Who Benefits from All These?
Given how much property tax you’re paying to the government, you may ask what the purpose of real property tax is. Well, like most taxes, the real property tax helps pay for public services and projects. The taxes your local government gets lets it fund things like emergency services, public transportation, road repairs, sewer maintenance, street lighting, parks, and so on. Of course, localities that get more support from the regional or national government don’t have to charge their residents as much, so they may have lower property taxes.
Now you have a better idea of how property taxes work. Knowing your obligations is an essential part of #Adulting, which sounds boring, but is actually a true sign of growth and independence. So the next time a friend asks “What is real property tax and how will I benefit from paying?” do them a favor and break it down simply.
Author Bio: Jeanette Anzon is the writer and editor for AdventureDweller.com. She mostly writes about home improvements, home guides and designs, and real estate investments.