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Your World of Taxes: Understanding How Property Taxes Work

Homeownership Program

Shows like Fixer Upper and Good Bones on HGTV where homes are bought, renovated, and sold off for a profit have become such big motivators for individuals to own real estate. And while the benefits of being a property owner – wealth creation, income diversification, and the opportunity to leverage your investment – are great incentives, there is one factor that looms in the background: Property tax.

Property taxes are a prime source of income for governments – whether state or local – as they help to fund state budgets, including expenses on education, law enforcement, and other social amenities in the community. However, these benefits do not erase the fact that taxes can be such a nightmare for many property owners. And it need not be.

Besides, while paying tax bills on time is a commendable act, without a proper understanding of the assessment process, i.e., how the calculations were arrived at, it would be almost impossible to notice when your tax assessment contains errors. To avoid this or determine how to handle such an eventuality, it is necessary to have a good grasp of property taxes. This breakdown will serve as a helpful guide.

What Are Property Taxes?

In simple terms, property taxes are compulsory contributions made by individuals and corporations on properties they own. The local government where the property is situated regulates the amount paid by each property owner. However, the property has to be appraised by a tax assessor before an accurate estimate can be arrived at.

How Is a Property Assessment Conducted?

To come up with an accurate estimate of a property’s value, a tax assessor would consider one or all of the following factors:

  • Selling rate of similar properties in the area.
  • Maintenance costs of the property.
  • Potential replacement costs.
  • Cost of improvements made on the property
  • Property income and revenue.

Calculating Property Tax

Regardless of the method a tax assessor employs, it is the current real estate market conditions that determine the estimated value of the property. To calculate property tax, multiply the assessed value of your property by the tax or millage rate.

It is important to note that the word ‘property’ as used here refers to real estate, that is, land and buildings. Also noteworthy is the fact that different properties attract different taxes based on their assessed value. Consequently, a constructed building would have a higher estimated value than a vacant lot.

What Factors Influence Changes in Property Taxes?

Property taxes do not have fixed rates. Each local government determines the tax rates in its jurisdiction, and as expected, this figure varies across various localities. As long as the value of homes, land, and property remain subject to changing market trends, it would be impossible to have a fixed rate for property taxes. The fact that these taxes are utilized for the public good also means that changes in the local or state budget could reflect on your tax assessment.

Conclusion

A proper understanding of property taxes would reduce the complexities of filing tax returns and paying tax bills. With this in mind, it is advisable to learn about your obligations as a property owner, keep accurate records, and stay abreast of tax legislation in your locale. Taking these steps will enable you to navigate the world of property taxes with ease.

References:

https://www.investopedia.com/terms/p/propertytax.asp

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