As per a survey by Tax Foundation, the amount of money Americans pay in annual property taxes differs by thousands on the basis of their residence. Speaking of properties and real estate, there are several categories of taxes that you need to be aware of.
When it comes to properties, terms like “real estate tax” and “property tax” are usually used interchangeably. But, there are very minute nuances between these two terms that make them drastically different in nature. In fact, if you start understanding these terms better, it will help you manage your finances well and also stop you from overpaying in taxes.
Sounds like a good deal, right?
Typically, many would say that “property taxes” are about the real estate taxes that are paid on your house or property. But, is just your house a property? While not many do not know, there are several types of property a person can own. In fact, each one of them is taxed differently.
Real estate tax is especially levied on stationary or physical properties, including your house and commercial buildings, among others. But, on the flip side, property taxes cover more than just real estate. It can be any mobile property, including vehicles, boats, yachts, or any larger piece of machinery.
When you know about real estate tax vs property tax, it will make it easier for you to understand your tax obligations and opportunities. So, let’s understand these terms more clearly. Stay tuned!
What is Real Estate Taxes?
Homes owners are required to pay real estate taxes, also usually known as property taxes on homes, on an annual basis. Moreover, the amount you generally have to pay completely depends on the assessed value of your property.
Plus, you need to keep in mind that every state and city municipality has its own established tax rate. This is basically a percentage found applicable to the fair market value of your home in order to find out your tax bill. In simple words, the tax assessment value is calculated by multiplying the fair market value of a property by the predefined percentage in that municipality. This process further tells us how much the real estate tax rate is.
Oftentimes, you may have encountered people who call out how high and unreasonable they consider their real estate taxes to be. That happens because the tax rates differ region-wise.
Let’s say, for example, that you are based out of Los Angeles. The value of the property and the municipal expenses in that particular region are incredibly high. That is what makes real estate taxes rise too. Similarly, the property taxes in comparatively smaller towns, such as Oklahoma, are way less than those in coastal areas.
That being said, there are typically two factors that determine the real estate taxes you owe. It is your home’s assessed value and the location it is in.
Formula of Real Estate Tax
The formula of real estate tax can be represented as:
Fair market value x Assessment rate x Tax rate = Effective real estate tax
How Real Estate Tax is Calculated?
Let’s say you own a house that is worth $300,000 as per market rates. Now, in your local area, taxes are evaluated by using a predefined percentage. In this case, let’s consider 60%.
That means, the tax assessment value of your home is going to be $180,000 (this is what your taxes are based on). This is basically the value we get for 60% of $300,000.
Furthermore, the actual amount of real estate tax that you pay every year is based on your local tax rate. Considering that your tax rate is 2.5%, you would need to pay $4,500 in real estate taxes each year. On the flip side, in case you are based in a different area with a higher tax rate, like 7%, then you would end up paying around $12,600 every year for a home that had the same market value.
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What is Property Tax?
In property tax vs real estate tax, property tax is a kind of tax that primarily affects items that are not permanently fixed and have the potential to move. It is also sometimes referred to as “personal property tax”.
Let’s consider your car, for example. Every year, you need to renew your registration. When you renew it, you are basically paying a property tax on it. But, why is that, you may ask? Well, it is because the car you own is considered personal property.
Moreover, this classification also includes items such as campers, airplanes, boats, and all-terrain vehicles (ATVs) – among many other business equipment. Additionally, because these items are mobile in nature, they are assessed as personal property tax on the basis of their value. The system is very close to what you would see for real estate taxes.
Another very interesting part of personal property tax is how it is applicable to mobile homes. Unlike traditional, old-school homes – mobile homes are typically taxed as personal property. That is primarily because they can be moved. However, in the event that you own the land, real estate taxes are payable on the location of your mobile home. These taxes are calculated according to the land’s assessed value.
Plus, the amount you need to pay in personal property tax is based on a number of factors, including but not limited to your municipal and local tax rates.
How Property Tax is Calculated?
It is the state and local governments that establish the rules on how to calculate property taxes. But, in general, this method includes the multiplication of the assessed value of your home by the local property tax rate. In fact, here are the two common formulas associated with the same:
The first is, Assessed home value x Tax rate = Property tax
In this case, let’s have a look at an example. For instance, if your home has been assessed at around $350,000 with the local tax rate being 1.5%, then it means you owe $5,250 each year in property taxes.
The second is the millage rate calculation. It can be calculated as, Assessed home value x mills / 1,000 = Property tax
The tax rate can also be represented in “mills”, which is referred to as the millage rate. That being said, one mill can be expressed as $1 tax per $1,000 of the assessed home value.
Let’s look at an example of this as well. Assuming that the value of your home is $350,000 with a millage rate of 30 mills, then your annual property tax would have to be $10,500.
This calculation that you are seeing depends either on a home’s assessed value or its market value. However, remember that they are not the same. Market value, as the name suggests, is the value that your home is potentially going to be sold for under the current market situation and by comparing it to similar properties in the same area.
On the other hand, the assessed value is usually lower. That is because it is determined by considering only the condition and features of your property. Note that every property in a certain jurisdiction is calculated based on the same tax status date.
How do Property Taxes Work?
Assessors, who are often called appraisers, typically work for local tax authorities, like cities and counties. One of their primary responsibilities is to understand the value of every piece of land and real estate that falls within their jurisdiction. In simple words, they also use databases that illustrate the value of each property.
Moving forward, they understand and determine your property tax through the above formulas. Moreover, the tax authorities can use a number of methods to identify changes in your home’s value, including inspections, reports taken from neighbors, value updates, and permit applications for renovation motives.
Plus, property tax bills can be forwarded annually, semi-annually, or quarterly. It all depends on the state’s or local government’s practices. That said, your monthly mortgage payment may cover your property taxes if your mortgage has an escrow account. Further, the mortgage servicer will take care of paying the taxes.
Key Differences Between Real Estate Tax and Property Tax
The first thing to note here is that the amount of tax you pay significantly varies between different types. For example, real estate taxes are typically a lot higher than personal property taxes. In simple words, the taxes you need to pay for a boat or a car would cost you far less annually, based on your state.
As you can guess, houses are valued way higher. This automatically means that homes are also taxed at a much higher rate. Having said that, it can be a wise choice to be strategic with tax deductions and select your property location in order to balance out any future financial burden.
But, that’s not even half the difference between real estate taxation and property taxes. There are a lot of other things that vary in these two terms. So, let’s have a look at the many differences between these terms:
| Tax Type | Real Estate Taxes | Personal Property Taxes |
|---|---|---|
| Definition | For real estate taxes, the taxes are on stationary property like land and permanent structures. | While, for personal property taxes, the taxes are about mobile assets such as movable homes, boats, airplanes, or RVs. |
| Flexibility | This is typically very less flexible and has strict regulations. | Property taxes are flexible and come with variable regulations by state. |
| Costings | It is typically higher due to the higher assessment percentages and tax rates. | This can widely vary. But, it is usually lower over time because of depreciation. |
| Payment Options. | In real estate taxes, the payable options are through | Payment options in this case vary by state and type of asset. |
| installments (typically quarterly). | ||
| Depreciation | The property value may appreciate. This can impact tax amounts as well. | In this case, the property value usually depreciates. It minimizes the tax over time. |
| Strategic Planning | It is integral to maximize deductions and choose real estate sites that minimize anticipated tax obligations. | It allows for the use of innovative tax strategies, like asset classification, to mitigate obligations.. |
Bottom Line and Key Takeaways
While used interchangeably, real estate tax vs property tax has several differences many do not know about. In fact, when we talk about the differences between these terms, it boils down to understanding where exactly the money is going.
As you know, real estate taxes are more about the stationary objects for which you pay taxes for. It can be your house, office space, a commercial building – anything of that sort. It is basically tied to the land and buildings that are not movable.
On the other hand, property tax is like a bigger umbrella in this case. It considers the properties that can be “moved” and are not stationary. It can be your yacht, boat, or camper.
One of the many reasons why you should understand why these two terms are so different in nature is because they can save you headaches during tax season. You may make better plans, save money, and possibly even discover a few tax breaks by understanding what is taxed where.
That’s about it. If you have any more questions about property tax vs real estate tax, you know who to call. The Ledger Labs is here to answer any questions you may have about this topic or those related to it. So, without further ado, get in touch now.
Frequently Asked Questions
Ques. How long do you have to pay property tax?
Ans. You basically pay property taxes for as long as you own that property. However, the value you will have to pay in property taxes is mostly going to depend on your residential location and the assessed value of your property. The amount you are required to pay may change over time.
Ques. Is real estate tax the same as property tax?
Ans. For the most part, yes. These terms are practically the same. In everyday life, most people use these terms interchangeably. But, there is a slight difference between them.
- Real estate tax is applicable to immovable property. It can be land or permanent structures, like a home.
- Property tax can include real estate tax, along with a tax on movable (mobile) possessions. It can be an RV or a private jet.
Ques. Are property taxes included in mortgage payments?
Ans. Well, estimated property taxes are typically integrated into your monthly mortgage payments. That means, you do not need to take on the additional burden of making separate property tax payments side by side with your home loan. But, you need to remember one key point in this case. Property taxes are not definite figures. This is why your mortgage may not always be enough to cover the payable property tax. On the off chance, you may have to pay a little extra, but that also means that you can claim a property tax refund in case there is an overpayment.
