As a Real Estate Investor or a property owner, it’s critical that you account for all expenses associated with ownership. One of the more significant factors that contribute to higher overhead costs is Property Taxes.

Property Taxes Aren’t “One Size Fits All”

One thing to keep in mind is there is no “One Size Fits All” as it relates to property taxes. In fact, every state and municipality is subject to distinct assessments that can result in substantial variances from zip code to zip code – and even property to property within the same area.

Generally, property taxes get assessed based on the current market value of the underlying real estate. The market value of the real estate is multiplied by the prevailing tax rate in the area to determine owners property tax liability. Since property values can get adjusted based on overreaching market factors, it’s worth noting the cost of your financial responsibility for property taxes is fluid and can increase or decrease. It is not a set or ‘static’ expense and can change from year to year.

How Property Tax Gets Used

Property taxes get used for supporting the community where you live. They may get used for various projects such as building new schools or maintaining existing schools, repairing streets and roadways, snow removal services, and other maintenance projects.

Local Government Sets The Standard

Ultimately, your local government determines what tax rate gets levied on property owners. Local tax assessors get tasked with the job of estimating the current fair market value of the properties within the district. Homes and properties with higher valuations are subject to higher taxes than residences and assets with lower market valuations. The state that you live or invest in are also factors that affect your property tax liability.

According to WalletHub, Hawaii had the lowest property tax rates in 2017, whereas New Jersey ranked the highest. Missouri ranks right in the middle.

Based on a home valued at $185,000, a homeowner in Hawaii could expect to pay around $500 in property taxes versus $4,400 + in New Jersey. A homeowner or investor in Missouri is responsible for approximately $1,850 for a property with the same valuation. As you can see, the state where you choose to live or make investments makes a significant impact on your property tax liability and your overall cost of living expenses.

While you might have an idea of what your property is worth, it is ultimately up to the tax assessor to determine the fair value of your property, since their evaluation is the one used when sending tax bills. Should you decide that you want to sell, renovate, or build, your home or property is subject to a reassessment using the forms and permits submitted to the city.

Once you’ve determined the assessed value of your home or property, the next number you need to know is the mill levy in your municipality. A mill levy is a fancy term for the property tax rate in your city or region. Mill levies vary from city to city, so you want to be sure you have the correct price for your area. Mill levies often get based on the amenities available in the community. A high-end neighborhood with better schools and well-maintained roads is likely to have a higher mill levy than a city with crumbling roads or a struggling school system. You can find out your local mill levy rate by calling or check your local government website.

Once you know what your home value and the mill levy rate in your town is, all you need to do is multiply your home’s assessed value by the mill levy percentage rate. The result is the amount of property tax you owe.

How Do Property Taxes Get Paid?

The way that your property taxes get paid is dependant on how you bought your home. In most cases, homeowners pay their property taxes using an escrow account provided by their mortgage servicer. Depending on the terms of your loan, a portion of your mortgage payment gets put into escrow to pay the tax liability automatically. Should you overpay your escrow account, you are likely to be eligible for a refund. If you don’t pay enough into escrow over the course of a year to pay the balance of your property tax liability, you might need to go ‘out of pocket’ to cover this bill.

How Can I Save On Property Taxes?

While there is no way for homeowners and investors to avoid paying property taxes, there are strategies available to help you minimize your overall tax burden, which saves you money in the long run. Our real estate education provides all the information you need to for investment and financial success!