A property’s tax bill would typically be arrived at by multiplying its assessed value by the mill rate and dividing the result by 1,000. For example, a property with an assessed value of $100,000 located in a municipality with a mill rate of 20 mills would have a property tax bill of $2,000 per year.
How Does a Property Tax Assessment Work?
Local governments use your assessment as the basis for calculating your annual property tax bill. Assessments are usually prepared on a specific date each year, and they’re often based on recent sales of comparable properties in the area. Property taxes are often the most significant source of revenue for governments. They pay for schools, parks and recreation, government employees’ salaries and benefits, transportation infrastructures, local law enforcement, and fire departments. Some buildings and land are exempt when they’re used for religious purposes. The timing of tax assessments can vary by jurisdiction. They might occur once each year or every other year, or sometimes every five years or more. Some locations require assessments whenever a property changes ownership. You can usually expect that your property’s assessed value will increase somewhat, raising your property tax bill, especially if assessments only occur once every few years. Your property may be appreciating in value. Property tax assessments can be flexible to a degree. Owners have a right to appeal assessments that they feel are way off. The downside is that you might have to act relatively quickly. Some areas confine appeals to a certain period of time after assessment notices are sent out.
Types of Property Tax Assessments
Governments typically assess a property by one of three methods: the replacement method, the sales comparison method, or (for business property) the income method.
The replacement method: Sometimes referred to as the “cost method,” the replacement method estimates how much it would cost to replace a property based on current rates for labor and materials. Reasonable depreciation is deducted, and the value of the land upon which the structure sits is added on. The sales comparison method: Also called the “market approach,” the sales comparison method is based on the sales prices of similar properties in the immediate area. The value is adjusted upward or downward, depending on any unique attributes. The assessed value will increase if the assessed property has a swimming pool, and comparable sales in the area don’t share this feature, for example. The assessed value will decrease if the property doesn’t have a pool but comparable sales do. This method is very similar to that used by lenders to appraise property for mortgage purposes. The income method: Business property is typically assessed using the income method. This considers the amount of income the property typically generates, adjusted by factors such as business taxes, insurance costs, and operating and maintenance expenses.
Do I Need to Pay Property Taxes?
Property taxes are an ongoing obligation. They don’t end when you pay off your mortgage, even if your tax obligation has been included in your mortgage payment all along. Your property taxes simply become a separate bill when your home is paid off. Many governments allow property owners to claim exemptions to reduce their assessments, however. You might be eligible for a homestead exemption if you actually live in the residence, or for a senior exemption if you’re retired. Many states also offer property tax exemptions for veterans. Some areas only allow exemptions for religious groups or not-for-profit groups. You also can at least claim a federal tax deduction for property taxes you pay locally, although you must itemize your deductions to do so. This might not be in your best interest unless the total of all your itemized deductions exceeds the amount of the standard deduction for your filing status. You can’t itemize and claim the standard deduction, too. For tax year 2021, you can claim a deduction for up to $10,000 total in property, state, and local taxes. All of these taxes are included under the same $10,000 umbrella.
