Home ownership comes with a variety of expenses, HOA dues and utilities are two of the obvious ones. But often, real estate taxes are an expense many home buyers forget about. If you’re asking the question – what are real estate taxes? Then this post is for you.
Real estate taxes and property taxes are often used interchangeably. So it’s understandable that many don’t realize these can mean two different things at times.
What Are Real Estate Taxes?
Most privately owned “real” properties have assessed real estate taxes. “Real property” is defined by the IRS as land, or anything that is built on it. These buildings can include condominiums, houses, industrial buildings and other structures. This is why, often most people refer to real estate taxes as property taxes, and typically they do mean the same thing. But there are some situations where these two tax terms differ. Often, the easiest way to think of the difference between the two is this:
Real Estate Taxes: Paid on assets that can’t be moved, such as land or a residence that doesn’t have wheels or go on a trailer.
Property Taxes: Paid on moveable assets. For example, this could include a mobile home since it is a moveable asset. This can also include vehicles.
Ultimately, if you own a home, rental property or a vacation home, you will pay real estate taxes on it unless you are in a tax exempt situation. Whereas property tax applies to moveable property, like your vehicle registration.
The revenue that comes from these taxes helps pay for things like public education in your local school district, local road maintenance and local government expenses. Of course, this revenue is affected by the local tax rate.
How do Real Estate Taxes Work?
Tax rates vary from state to state, and even from one county to another. Ultimately, your county of residence charges the owner property taxes on their real estate. Hence the confusion between property taxes and real estate taxes. Regardless of what you call them, real property taxes are based on the assessed value of your home or real estate property. Overall these taxes offset the cost of providing services to the public, such as fire and police, libraries and education.
If you own real estate, then you pay these taxes. It’s essential that home and property owners pay their real their taxes in full each year, and pay on time. In the event a property owner doesn’t pay their property tax bill, their local municipality will place a lien against that property. If the taxes are still not paid, the property goes into foreclosure.
But how much can you expect to pay? This is where the property tax rate and assessed value comes into play. Real estate taxes are handled differently than other taxes, such as income tax or personal property tax.
How Are Real Estate Taxes Calculated?
Now that you have an idea of what real estate taxes are, it’s important to understand how they’re calculated. You calculate this tax as a percentage of the given property’s tax assessed value. For example, you bought your home for $325,000 this year, we’ll assume this is the current market value. The given percentage in your local county or municipality is 60%. So, the calculation is $325,000 multiplied by 60%, this equals your assessed value, $195,000.
Then, consider your local tax rate, for this example we’ll say it is 3%. So, take your tax assessed value of $195,000 multiplied by 3%, to get $5,850 as your annual real estate taxes.
This is important to take into consideration if you are currently searching for a home. Tax rates differ by location, and while two or three percent may seem like a small difference, it can save you thousands in annual taxes.
How Do You Pay Them?
When you buy a home, your real estate taxes are typically split into installments and added to your monthly mortgage payment. The tax funds are held in escrow until they are actually due. Then the lender pays them on your behalf. A tax professional or your mortgage lender can estimate your annual tax bill.
What Are Real Estate Tax Exemptions?
In some cases, a property may be exempt from real estate taxes. Broadly, this includes certain nonprofit or religious properties. Some other groups like veterans, senior citizens or low income individuals may be exempt as well. However, exceptions typically come with specific paperwork and applications.
Veteran Property Tax Exemption
Active military members and veterans typically qualify for certain tax exemptions. This often includes property taxes in many states. We recommend doing your research if you fall into this category, as you may be exempt from a specified amount of property taxes. Everyone’s situation is different, but in some locations there are even options available for the surviving spouses of military members.
For home owners paying taxes on their primary residence, consider researching a homestead exemption. This tax exemption allows homeowners to protect a specific amount of their primary residence’s value from property taxes. Ultimately, this limits the total amount the homeowner pays in real estate taxes, and could end up saving you thousands.
Individuals with a disability are eligible for a number of exemptions and even some tax credits. It’s likely you will need to provide documentation of your disability in other to confirm your exemption. But, with research you may also find specific tax deductible options for your home as well. For example, a ramp for wheelchair access in your home may be an expense you can deduct from your taxes. With that, senior citizens of a certain age may also be eligible for some tax exemptions.
What Are Real Estate Taxes: The Bottom Line
Ultimately, by now you know property tax and real estate taxes are two very similar things with a few key differences. You also know that as a home or property owner, you pay real estate taxes unless you meet an exemption. But, taxes can still be confusing, and paying them late is a risky move. At Trelora, we recommend consulting an expert to ensure you understand you tax situation. We’re here to help as you consider purchasing a home. Trelora agents make understanding the tax rates of various locations you’re interested in, just a little bit easier. Connect with a Trelora agent today to get started.
Brock Embree joined Trelora in 2017. In 2018, he was part of the founding team that opened Trelora’s Seattle, Washington office, their first expansion beyond Colorado. In 2020, he repeated the process, opening yet another new market for Trelora in Arizona. His team has closed over 200 deals in Phoenix and has expanded to serve Tucson in addition to their growing customer base in Phoenix.