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A property tax bill is part of the homeownership experience. Local governments collect these taxes to help fund projects and services that benefit the entire community—things such as roads, schools, police, and other emergency services. There are two primary ways to pay your property tax bill: as part of your monthly mortgage payment or directly to your local tax office.
Key Takeaways
- Local governments collect property taxes to help pay for services and projects that benefit the community.
- Property taxes are an ad valorem tax, so the tax is based on the value of the property.
- If you have a mortgage, your property tax may be rolled into your monthly mortgage payment. Otherwise, you pay the tax office directly.
- You may also owe taxes on personal property for items such as your car, boat, or RV.
Ad Valorem Tax
Property taxes are an ad valorem tax, meaning the tax is based on the assessed value of an item. A property assessor determines the value of your property by estimating its fair market value (FMV)—the price a willing buyer and seller would agree upon in an open market.
To do so, the assessor reviews the sales records of comparable properties in the area—known as “comps”—that are similar in condition, features, and size. The assessor may consider other factors, too, such as the property’s rental income history (or potential), replacement costs, maintenance costs, and any recent improvements you made to the property.
How Is Property Tax Calculated?
To determine your tax bill, the tax office multiples your property’s assessed value by the local tax rate. For example, if your home is assessed at $200,000, and the local tax rate is 1%, your tax bill would be $2,000. Of course, the higher the assessed value, the higher the tax bill.
Some local governments apply the tax rate to just a portion of the assessed value. This is known as the assessment ratio. If your home is assessed at $200,000, and your county has an assessment ratio of 80% and a tax rate of 1%, your tax bill would be $1,600 ($200,000 × .80 × .01).
How to Pay Your Property Tax
In general, there are two ways to pay your property tax bill: as part of your monthly mortgage payment or directly to your local tax office.
PITI
If you have a mortgage, your property taxes may be rolled into your monthly mortgage payment. If so, your lender divides your estimated tax bill by 12 and includes that amount in your monthly payment, along with the principal, interest, and private mortgage insurance—four costs collectively known as “PITI” (principal, interest, taxes, and insurance). For a $2,000 annual property tax bill, for example, you would pay about $167 a month. Your lender estimates your tax bill, so you’ll get a refund if you paid too much, or you might have to make an extra payment if the amount you paid comes up short.
You can find out the total amount of property tax you paid by looking at box 10 (“Other”) of IRS Form 1098. Your lender will send this to you by January 31st if you paid $600 or more in mortgage interest the previous tax year. If you didn’t receive a 1098—and you should have—call your lender or find the information on your lender’s website. You may be able to lower your tax bill by appealing your assessment (if you think it’s too high) or finding out if you’re eligible for any exemptions.
Pay Your Local Tax Office
If you don’t pay your property tax as part of a monthly mortgage payment, you’ll pay the tax office directly. You should receive a bill in the mail that includes payment directions. Depending on where you live, you may have several payment options:
- By check or money order sent through the mail
- Online using a credit or debit card
- Online using an electronic check payment (eCheck)
- By telephone using a credit or debit card
In addition to the different payment options, you may get to choose if you want to pay the bill all at once or split it into monthly, quarterly, or biannual payments. Pay attention to any prepayment discounts offered—some municipalities provide a discount if you pay early.
Personal Property Taxes
Real estate—your land and any property attached directly to it—is called “real property.” When people talk about property taxes, they’re usually referring to this type of property. Of course, real property tax may not be the only property tax you owe.
Depending on where you live, you may also owe taxes on personal property. Personal property is classified as tangible, which includes cars, boats, RVs, and aircraft, or intangible, consisting of things like stocks, bonds, insurance policies, and intellectual property. Like real property taxes (those on your home), personal property taxes are an ad valorem tax, meaning they’re based on the value of the property.
Tangible personal property taxes typically fall from year to year as the property’s value decreases. The value of intangible personal property taxes, is made using a method known as calculated intangible value (CIV).
Implications of Not Paying Property Taxes
Not paying your property tax bill can result in a cascade of financial and legal consequences. Initially, you may face penalties and interest on the overdue amount. This will steadily increase the amount you owe.
Failure to address the issue promptly can lead to a tax lien on your property. A tax lien gives the government a legal claim on your property. This can also hinder your ability to sell or refinance the property, as you have to disclose whether or not there are liens/legal claims against your property during the sale process. There is also an industry that will buy this debt; the National Tax Lien Association estimates that $21 billion of real estate property taxes go delinquent each year, with up to $6 billion of these taxes being auctioned off to private investors.
One of the more severe repercussions is the potential for foreclosure. If property taxes remain unpaid for an extended period, the government may initiate foreclosure proceedings. This means they take control of your property, auction it off, and use the sale proceeds to recover the outstanding tax debt. This impact extends beyond the immediate financial burden, as a foreclosure can have long-term effects on credit scores and the ability to secure loans or housing in the future.
When Are Property Tax Bills Typically Due?
Property tax due dates vary by location but are commonly set on an annual or semi-annual basis. The due date is predetermined by local tax authorities. Typically, tax bills are sent well in advance of the due date, providing property owners with sufficient time to make necessary arrangements for payment.
How Are Property Taxes Calculated?
Property taxes are typically calculated by multiplying the assessed value of a property by the local tax rate. The assessed value is determined through evaluations by tax assessors, taking into account factors like the property’s size, location, and features. The tax rate, set by local authorities, is a percentage applied to this assessed value. Additionally, specific local projects or services may result in additional assessments, contributing to the overall property tax bill.
Can I Pay My Property Taxes in Installments?
Yes, many jurisdictions offer installment plans to help property owners manage their tax payments. These plans allow taxpayers to spread the financial burden over multiple payments throughout the year.
What Happens If I Sell My Property Mid-Year?
In the event of a mid-year property sale, property taxes are typically prorated between the buyer and the seller. The buyer assumes responsibility for the portion of taxes owed for the remainder of the year, and a portion of this may be due at closing.
The Bottom Line
Everyone who owns real property is on the hook for property taxes, whether it’s for a house, farm, or vacant land. While you can’t get out of paying property taxes, you can deduct up to $10,000 in combined state and local taxes—including property taxes.
If your property taxes are rolled into your mortgage payment, note that your lender must pay the tax on your behalf before you can claim the deduction. Contact your lender if you have any questions about the payment schedule.