subject: Overview of Property Tax and Real Estate Exemptions [print this page] Overview of Property Tax and Real Estate Exemptions
Property tax is assessed against commercial and residential real estate. The amount of property tax varies by each state. Property tax revenue is used to pay for community needs and can include road repairs, school improvements, building new schools, and law enforcement, firefighters and emergency responder salaries.
Property tax can be calculated by multiplying the assessed property value times the state tax rate. For instance, if state property tax is 5-percent and the appraised value of real estate is $150,000, the annual property tax would be $7500.
Most states allow homeowners to pay property taxes in semi-annual installments. Using the example above, property owners would pay $3750 per installment. Homeowners would need to set aside $625 per month to cover real estate taxes. This amount is in addition to home mortgage installments.
Property taxes are often included in home mortgage loans and placed into an escrow account. Mortgage lenders submit property tax installments to the county tax collector on behalf of the homeowner. If banks do not escrow sufficient funds, homeowners are responsible for paying deficiency amounts.
When mortgage lenders do not include property taxes in home loans, borrowers are responsible for paying taxes directly to their state tax collector. If homeowners fail to pay property taxes on time, mortgage lenders can demand payment in full. Banks consider nonpayment of property taxes as loan default and can initiate foreclosure proceedings.
Property tax bills are usually divided into three categories and include: school districts, municipality and county. Approximately 60- to 70-percent of property taxes are allocated to school districts. The remainder is distributed to cover local and county government expenses.
Property tax rates cannot be modified without being passed through government legislation. Assessed property values are subjective and can vary from year to year. Multiple factors are involved when calculating appraised real estate values.
Tax assessors can appraise property values on the historical value of the real estate; comparative sales of other homes in the area; or potential value when real estate is used to generate revenue through rental homes or house flipping.
If property owners suspect they are overcharged they have the right to contest property tax assessments. Government agencies and tax appraisers can make mistakes, so property owners should compare property tax statements on a regular basis. Review each tax bill to ensure the property address, lot size, number of rooms, square footage and appraised value is correct.
Contesting tax bills requires time and patience. The first step involves contacting the county tax assessor's office to schedule an appointment. Homeowners should retain previous tax bills and take copies to their meeting. If mistakes are found, adjustments are reflected in future tax bills instead of receiving a refund check.
Some property owners are entitled to property tax exemptions. The most common is the Homestead exemption which is available for houses used as the owner's primary residence. Homestead exemptions are usually a fixed amount, but can vary widely by state. For example, Louisiana offers an exemption for the first $75,000, while California exempts the first $7000 and Florida allows a homestead exemption of $25,000.
Mortgage lenders can provide estimated property tax amounts when taking out a new home loan or entering into mortgage refinance. When in doubt, it is best to consult with a real estate lawyer or tax accountant.
