Homeownership & Property Taxes
If you are contemplating becoming a homeowner, you may be surprised by the myriad of expenses associated with owning your own home. In addition to your monthly mortgage and insurance payments, maintenance costs, and various other expenses, you will be responsible for paying property taxes. As you map out your path to homeownership, be mindful of these tax obligations.
Are property taxes the same as real estate taxes?
Not exactly. Although the two terms are often used interchangeably, there are actually two types of property tax: real estate tax and personal property tax. Property taxes are only imposed by state and local governments, varying widely across the United States.
Real estate tax is levied on real property, defined as land and any property permanently attached to it. Real property can include buildings, ponds, roads, and other natural resources or manmade structures.
Personal property refers to property that is movable, such as clothing, furniture, vehicles, boats, or collectibles.
Most property taxes are assessed on real property in the form of real estate taxes; depending on the state or municipality, personal property may also be taxed. Most personal property taxes affect businesses; taxable business assets may include machinery, office equipment, inventory, or other tangible property that helps generate income. Some state or local governments also place ad valorem taxes on personal property such as motor vehicles, aircraft, or boats.
How are property taxes assessed?
Property tax is an ad valorem tax, meaning that it is based on the value of the property. How much a property owner owes in property tax is determined by multiplying the property tax rate by the assessed value of the land or property owned.
In the case of real estate taxes, property values are determined by a local tax assessor; this assessed value is used to calculate the property tax owed. Some governments may freeze property values at a “base year value” to prevent rising property values from affecting homeowners’ property tax liability. Most local property tax codes allow for property owners to discuss or formally contest their home’s assessed value to ensure accurate and fair taxation of their property.
The payment schedule required for property taxes varies by locality. Unpaid property taxes may result in a lien against the property by the taxing authority.
How are property taxes used?
Property taxes provide a major source of revenue for state and local governments, used to fund government services such as public education, parks and recreation services, road construction and maintenance, sanitation, and public safety services. The allocation of property tax revenues varies by state or municipality.
Can I deduct the cost of my property taxes on my federal tax return?
You may be eligible to deduct the cost of certain state or local property taxes on your federal tax return. If you itemize your tax deductions, you may be able to deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes. Eligible property taxes include those paid on your primary home, co-op apartment, vacation home, land, property outside of the United States, motor vehicle, or boat.
Property taxes deductions are not allowed for the following:
Property taxes on property you do not own.
Property taxes that haven’t yet been paid or were paid in advance of billing.
The portion of your tax bill used for services such as sanitation and water.
Transfer taxes on the sale of your house (although these can be used to increase the cost basis of your home).
Homeowners association assessments.
Payments on loans to finance energy-saving home improvements (although the interest portion of the loan may be deductible as home mortgage interest).
For further assistance navigating the complex tax implications of homeownership, reach out to your local CPA.