There are several different types of Real Estate Taxes. However, I do think when someone asks the question “Are Real Estate Taxes the same as Property Taxes?” They are correct in what they are assuming. It is better to answer this way… Property Taxes are Real Estate Taxes.
In case you are asking for other reasons, let’s dive into the different types of taxes that are in Real Estate. Let’s also discuss how property taxes are allocated to certain governmental agencies. Disclaimer: I am not an expert tax advisor, I am a Realtor, so if you have deeper questions about your Real Estate taxes…talk to your CPA.
Real Estate Taxes is probably the most boring subject to write about next to IRS taxes, but I am ready to take it on.
Table of Contents
Types of taxes
- Property Taxes / Ad Valorem Taxes
- Special Assessment Taxes
- Capital Gain Taxes
Property Taxes / Ad Valorem Taxes
Property taxes (Ad Valorem Taxes) are general taxes that are assessed based on the assessed value of the property. Usually, it is through your county, city or township where taxes are legislated and given a percentage called a “Millage Rate”.
Property taxes (although general) are allocated within the government into special districts. These districts include some of the following: County, School Districts, City, Fire Protection, Libraries, and many others.
Special Assessment Taxes
Special assessment taxes are taxes that are levied against specific properties that will benefit from a public improvement. Examples of a benefit would be sidewalks, medians, sewers or water services.
For example: Let’s say there is a 1,000 home subdivision of which 250 homes were built without sidewalks. When the county installs sidewalks totaling $400,000 in front of the 250 homes, those homes will be specially assessed for $1,600 each even though there are 1,000 homes in the subdivision. Only the homes that benefit are assessed.
The special assessment tax disappears once it is paid.
Capital Gain Taxes
Capital Gains Tax is taxes that are paid on an investment property after a sale. Check with your tax advisor for the current tax rates. Typically, Democrats favor higher taxes and Republicans favor lower taxes. So the rate can change depending on who is in power.
Capital gains are simply income gains on investments once sold. There are short term capital gains (held for a year or less) that are taxed at a higher rate and long term capital gains (held for over a year) that are taxed at a lower rate.
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How to Calculate Property Taxes
To calculate property taxes you must first find the assessed value of your home. The way you find that is to find your local county assessor website, put in your address and search.
There will be an assessed value from the county assessor in which they calculate with the Millage (Mill) Rate. Here is a sample of a tax assessor for El Paso County Colorado.
Keep in mind that the assessed value is not the “Market Value”. The assessed value will be a small percentage of the actual value.
Next, you will need to find the Millage (Mill) Rate for your area. You can find the Mill rate on the same Assessor site when you look up your address.
Here is how to calculate once you have your information:
A mill is one one-thousandth of a dollar which is $.001. So if you see a mill rate of 77.31 on the assessor’s website, you will calculate .07731 as the mill rate.
Let’s say your assessed value is $25,000, take $25,000 x .07731 and it will equal your property taxes for the year at $1,932.75.
So the Assessed Value x Mill Rate = Tax rate for the year.
Property Tax Deductions
Property taxes may be deductible on IRS taxes if a homeowner itemizes their tax returns. Always consult a tax professional. A homeowner may be able to deduct property taxes of their main residence and deduct the property taxes of an investment property. There may be a limit to the amount deductible, but in 2018 it was $10,000.
Can Property Taxes be Disputed or Discounted
There are several ways that taxes may be disputed or discounted. If the homeowner feels that their home is not worth the assessed value that the Assessor has placed on the home, they can dispute the value with the Assessor. This could potentially cause the Assessor to visit the home to determine value.
If the value is determined to be lower than the assessed value, the Assessor may lower the value and hence your taxes will be lower.
Many County’s have a Senior exemption/discount for property taxes. Many homeowners once retired are on fixed incomes and paying property taxes can become burdensome if they are too high. Once a homeowner reaches a certain age, they can request a Senior Exemption. This will allow their property taxes to come down significantly until the home is sold at the end of their lifetime.
Mortgage escrow is where a homeowner’s lender will collect a certain amount of money from the monthly payment and hold that money in an escrow account. This is then used to pay the homeowner’s property taxes and insurance for the home.
Example: If the homeowner has a principal and interest payment to the bank for $1,000/month and the homeowner’s taxes and insurance amount to $1,200/year, the lender will set the homeowner’s payment at $1,100/month.
That extra $100 per month is held each month to pay the property taxes and insurance each year they are due.
Most lenders require a mortgage escrow. The reason for this requirement is because if the taxes are not paid, a tax lien can be sold and cause a homeowner to lose the property. Taxes become the dominant lien.
There is no negotiating or opting out of this.
In regards to insurance, if a homeowner fails to pay for insurance on a home and the home burns to the ground, the bank will lose the asset protection they have against the home. The homeowner will most likely walk away and the bank will have nothing to foreclose or sell to recover the money it had loaned the homeowner.
Wrapping things up
Whether you are a resident of your own home or you own an investment property, there are taxes on every property in the nation. As the saying goes…”There are two things that are certain in every human life…Death and Taxes. There are property taxes each year, possible special assessment taxes and maybe even capital gain taxes. A homeowner cannot escape it.
The only tax position you can look forward to in owning real estate is to get the Senior discount down the road.