If you are in the market for buying your first house, you might be hearing about real estate taxes for the first time. More confusingly, you might also hear the term “property taxes” when speaking about the taxes that you will pay on your future home.
The concept of real estate taxes vs. property taxes can cause quite a headache, especially when they are interchanged often. Keep reading for a detailed explanation of what real estate and property taxes are and how these differ from personal property taxes, another form of taxes that may be new to you as well. Remember that taxes don’t have to be difficult; TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for. If you have questions, a TurboTax Live tax expert can help you along the way or fully do your taxes for you.
What Are Real Estate Taxes?
Real estate taxes, commonly known as property taxes, are annual taxes that homeowners pay based on the assessed value of their homes. It’s important to note that it’s not just your house that is subject to these taxes; it’s any piece of immovable land that is considered yours, including buildings, land plots, and any commercial property that you may own.
Real estate taxes are paid to state and local governments and serve a multitude of purposes, including:
- Schools: Many schools use real estate taxes to help maintain schools and pay teacher salaries.
- Safety: These taxes help fund public safety throughout the community, such as the police force, EMTs, and firefighters.
- Spaces: Shared outdoor spaces like parks, ball fields, and nature preserves are maintained by real estate taxes.
- Streets: Real estate taxes go toward the construction and maintenance of roads.
- Sanitation: In most areas, street cleaning, trash collection, and sewer management are funded by real estate taxes.
- Services: Real estate taxes fund public services such as libraries, animal shelters, and local health departments.
How Are Real Estate Taxes Calculated?
Real estate taxes vary greatly based on several factors, even if you have multiple properties within a few ZIP codes of each other! The local average home value, weather events, tourism, and the success of local businesses all impact how much you’ll be paying for real estate taxes. While the amount owed varies, the national average real estate tax is $2,471. It’s important to note that some states have property taxes lower than 0.5%, while others have rates higher than 2% of the home’s assessed value.
The real estate tax rates are set by city and state officials by multiplying the fair market value of a home by the predetermined percentage in that city. Notoriously, larger cities such as New York City or Los Angeles have higher tax rates due to the higher fair market value of their homes. Keep in mind that there are ways to lower property taxes which might be helpful if filing an appeal on a high assessment.
Additionally, these factors can drive up the cost of real estate taxes:
- Renovations: Certain home renovations like finishing a basement or installing a fence can increase your home value, which will in turn increase your real estate taxes.
- Neighborhood changes: If your neighborhood is gaining popularity, most likely, the cost of available homes also increases. This can increase your home value, even if you didn’t make any changes to your existing property.
How Are Real Estate Taxes Paid?
Property taxes can be paid with your mortgage payment every month, also known as impounds or you can pay your property tax payments outside of your mortgage payments twice a year by the installment deadline.
Depending on the terms of your home loan you may be required to pay your property taxes with your mortgage payment. If this is the case, property taxes are split up into installments that are included in your monthly mortgage payment. These installments are held in escrow until the property tax due date, and then the bank or lender will pay them for you.
As the lender estimates the cost of the property taxes ahead of time, you might end up underpaying the property tax fee based on the current escrow. If this happens, your escrow payment will be increased appropriately going forward. Likewise, if the lender estimates too high, you will be entitled to a refund.
If you are not required to pay your property taxes with your mortgage or if you don’t have a mortgage loan, you will be able to pay your property taxes directly to your local tax office twice a year. You’ll be billed in the mail for the first and second installment payments with instructions on where to send payment to and how much the payment will be.
If you have paid at least $600 in mortgage interest during the previous tax year, you’ll be receiving an IRS Form 1098, where box 10 tells you how much you have paid in property taxes.
What Are Personal Property Taxes?
Although personal property taxes may sound interchangeable with property taxes, they are not the same. Personal property taxes are the annual tax on the movable things that you own. These include things like a boat, plane, or recreational vehicle. If you own a business, this tax could be imposed on furniture, tools, and equipment.
Personal property taxes can look a little different than real estate taxes. For example, the fee that you pay for your annual vehicle registration is a type of personal property tax. In addition, some states impose a flat rate across all personal property types, whereas other states have different rates for different types of personal property.
Generally, these taxes are paid at the state or local levels, but some areas do not require taxes to be paid on personal property at all.
How Do Personal Property Taxes Work?
Similar to real estate taxes, personal property taxes are calculated as a percentage of an item’s value. Unlike real estate taxes, this value (and therefore the tax) typically decreases over time as the perceived value also decreases.
Generally, these taxes are self-reported on your tax returns. In addition, most municipalities will consider a certain amount of property as exempt from taxes. For example, if your city exempts the first $60,000 in personal property, but you own $80,000 worth, you’ll be required to pay taxes on the remaining $20,000.
Real Estate vs. Property Taxes
It may be confusing to keep these two types of taxes separate, partially due to how often the terms “real estate taxes” and “property taxes” are used interchangeably. However there is a way to keep these two straight:
- Real estate taxes (or property taxes) are paid on immovable assets
- Personal property taxes are paid on movable property assets
Another way to think about this is to understand that real estate tax (i.e., property tax) is based on just that — real estate. Personal property taxes are then based on personal property — property you own that is not real estate.
When Is Real Estate Tax Due?
While real estate taxes are annual, the actual date that they are due varies by state and even city. As stated above, if you have a mortgage that requires you to pay your real estate taxes with your mortgage payment, in other words have it impounded in your mortgage payments, the lending company will take care of sending the taxes you paid held in escrow to the tax authority. If you will be paying through the city or town you live in, you will be billed accordingly.
Typically, Property taxes are paid in two installments with the first installment being due by November 1st, and the second installment is due February 1st. You can check with your city or town’s website for further information on tax deadlines.
When Is Personal Property Tax Due?
Most generally, personal property taxes are assessed and due annually on January 1 of each year. Remember that when you make purchases of certain personal properties, you may have to register them with your local tax office, either online or in person, to describe the details of the property.
Mobile Homes: The Special Circumstance
If understanding the differences between the two tax types wasn’t already confusing enough, there’s one special circumstance that can cause even more confusion: mobile homes. Under the definition of personal property tax, anything that is movable, such as a car, boat, or trailer would be subject to this tax, including a mobile home.
However, if the mobile home has its wheels removed and is permanently fixed to a foundation, and you own the land beneath it, it would instead be considered a permanent, immovable property and therefore would be subject to real estate taxes instead.
Understanding the differences between real estate taxes vs. property taxes can be challenging, but hopefully, this information helped clarify the difference. Remember: If you own property like a house, land, or business, you’ll need to pay real estate taxes yearly, and depending on where you live, you’ll also need to pay personal property taxes on movable assets like RVs, trucks, and boats.
Don’t worry about knowing the ins and outs of real estate and property taxes. TurboTax will ask you simple questions about you and guide you through correctly claiming your deduction for real estate and property taxes. If you have any questions about filing your taxes with this in mind, consult one of our tax experts to help clarify what should (and shouldn’t) be claimed when filing taxes.