One of the best things about being a homeowner is the fact that you no longer have to pay rent. While this is a great thing, you should not make the mistake of thinking that you will never have to pay for your home again. As a property owner, you will be required to pay property taxes every year. Failure to do so can result in all kinds of legal penalties, up to and including the seizure of your property.
Why Are Property Taxes Necessary?
Although they might seem like an inconvenience, property taxes pay for a lot of local services. Whether it’s the salary of the local police or the cost of running the local elementary school, property taxes are essential to the survival of most cities and towns.
If you want to get a more exact idea of how important this revenue is to each state, here is an interactive map that can tell you a little more. As you can see, property taxes are the single largest source of revenue for the various state governments, representing an average of 31%. In some states, the numbers go as high as 40% or even 60%.
How Are Property Taxes Calculated?
There is a complex system by which property taxes are calculated, and it will vary from one jurisdiction to another. This makes the whole process somewhat confusing, but we will try to simplify things for you as much as possible.
Property taxes are calculated on the basis of one thing, and only one thing: The value of your property. The more valuable your property, the higher your property tax will be. This would seem to be a fairly simple and straightforward system, but there’s just one catch: Property value can be calculated in three different ways.
When it’s time for the state to demand your taxes, they will send an assessor to inspect the property and make a determination as to its value. Each assessor has the option of calculating your property’s value in three different ways: The Mill-Levy method, the cost-replacement method, or the income method.
The Mill-Levy Method
This system is based around the use of a certain unit of measurement, called a mill. One mill represents one dollar in relation to $1000 of total property value. Thus, if your rate is set at one mill, and your property is worth $10,000, you will pay ten dollars. Obviously, the rate will likely be much higher than one mill, but this should give you an idea of how it works.
The Cost-Replacement Method
This method of assessment is based not on the price for which your home could be sold, but on the cost required to replace it entirely. In most cases, these types of estimates are made in matters relating to the insurance industry. Obviously, replacement costs are a much more important factor when dealing with that kind of a home value assessment. However, some state and local governments choose to assess property taxes with this method.
The Income Method
This method is the norm when dealing with rental properties. If you are not renting your property or trying to rent your property, you are unlikely to be assessed in this way. An income-based method will determine your property’s value based on the amount of income it generates for you. For landlords, this would obviously include rent and deposit payments. Of course, you can get a variety of deductions from the many extra expenses that come with being a landlord. As long as you follow the rules laid down by the IRS, you should have no problems using these deductions to get your taxes down to a reasonable level.
Contesting Your Property Taxes
Why is it important for you to know all of this stuff? Very simple: Because you can dispute your tax rate if it is too high. Of course, you cannot make such a challenge based on your opinion. You will have to prove that your rate is unreasonable, and you will have to do it using the rules in your jurisdiction. By figuring out an estimate of your property tax rate (based on all applicable rules), you will be able to tell when the government is overcharging you.
To start this process, you will definitely need the services of a good attorney, and you should (of course), choose a lawyer that specializes in this sort of thing. Thankfully, there are quite a few of them, so you shouldn’t be starved for options here. You can show your attorney that you are serious by taking a few preliminary steps.
Check Your State And Local Laws
This fact cannot be stressed enough: Every state and locality has slightly different rules when it comes to property taxes. Even if you are talking about two cities within the same state, you should not assume that the tax rules will be uniform throughout. It always pays to do your research and figure out the rules for your area so that you can avoid any unpleasant conflicts with the tax authorities.
State laws are definitely more important than local laws when it comes to property taxes. For a general idea of which states have the highest and lowest property taxes, you might want to check out this interactive map to see how your area rates.
By now, you are probably scratching your head and wondering how anyone can possibly expect to understand all this. Thus, you are beginning to understand why people dedicate entire careers to learning and utilizing the various tax laws. If you are looking for a shortcut, you might try using this handy online calculator. Bear in mind that it will only give you a rough estimate, but it’s not a bad place to start. We sincerely hope that our article will help you to save some money on your next property tax payment, and we invite you to fill out the contact form below so that we can bring you more informative content like this.