What is Real Estate Taxes?

Real estate taxes, also known as property taxes, are levies imposed by governments on a homeowner. Real estate taxes are based on the home’s assessed value and the tax rate set by local authorities.

A Longer Definition: Real Estate Taxes

Real estate taxes are annual financial obligations that homeowners pay to their local government or governments.

A homeowner’s real estate tax bill is determined by two key factors: the assessed value of the property and the local tax rate.

Property assessments are conducted by local government officials. Assessments are meant to reflect the property’s market value. The assessed value of a home is not “what the home would sell for.” It is a value used only by the municipal government for taxation purposes.

Some homeowners prefer their assessed value to be as low as possible because lower assessments mean less taxes paid.

The second factor that determines the annual real estate tax bill is the local tax rate, which varies based on specific taxes in the community, such as funding for schools, infrastructure, and public services.

Property taxes are a significant source of revenue for local governments and play a crucial role in funding community services and amenities.

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Real Estate Taxes: A Real World Example

When a first-time home buyer purchases a home, the closing process often involves collecting several months of real estate taxes in advance as prepaid expenses.

A home buyer may pay up to 14 months of property taxes upfront at closing to ensure they stay current on their tax obligations while providing a buffer of payments toward the next tax cycle. Most mortgage lenders collect 1/12 of the annual tax bill in each monthly mortgage payment.

Tax bills vary based on a property’s assessed value and the local tax rate, which can fluctuate depending on municipal needs and budgetary decisions. The tax rate can be as low as 0.5 percent per year and range as high as 3 percent.

Common Questions About Real Estate Taxes

How are real estate taxes calculated?

Real estate taxes are calculated by multiplying the assessed value of the property by the local tax rate.

Can real estate taxes change?

Yes, real estate taxes can change when there is a reassessment of the property value, or if the local tax rate is adjusted via new or expiring levies.

How often do I pay real estate taxes?

Real estate taxes are typically paid annually, but some areas may allow semi-annual or quarterly payments.

What happens if I don’t pay my real estate taxes?

Failing to pay real estate taxes can result in penalties, interest charges, and in extreme cases, a lien against the property.

Are real estate taxes deductible?

Yes, real estate taxes are often deductible on a federal income tax return, but some limits and rules apply. It is best to ask an accountant for clarification.