Property Tax Basics

Depending on a number of factors, primarily location, your property taxes represent a significant chunk of your overall tax payments. However, it's important to remember that this revenue is used locally for such vital resources and services as public schools, fire and police protection, roads, parks, streets, sewer and/or water treatment systems, garbage removal, and public libraries. In turn, a vital community with these important amenities will help maintain the value of your property; thus, property taxes and property values have symbiotic relationship (at least in theory).

It's a good idea to get up to speed on property tax basics if you are a homeowner or planning to become one.

Property Taxes at a Glance

There are many types of property subject to property tax although the tax is most commonly based on the value of real property (i.e. land). Municipal governments use property taxes to collect revenue probably more than any other taxing authority. Municipalities gain their authority to levy property taxes from state law. Property taxes are used to help finance local government, funding shared resources that individual property owners couldn't reasonably procure on their own (such as police or fire protection).

Taxing land and buildings is one of the oldest forms of taxation in the United States, and actually has its roots in ancient Egypt, Persia, and China. Before income and sales taxes, local governments used property-based taxes to finance most of their activities. Property taxes remain a major source of revenue for local governments. Most local governments collect taxes on both real and personal property, but they have been moving away from taxing intangible property such as bank accounts and corporate stocks and bonds.

Property Tax Assessment

There are three main methods of determining how your property tax obligation is assessed (and it's important to note that an appraisal and an assessment may result in different property value determinations): cost approach, sales comparison approach, and income approach.

  • Cost - Value of just the land itself is added to the value of any structures (homes, etc.) and amenities (pool, etc.), minus the depreciation of the home and amenities.
  • Sales Comparison - Based on the average of comparable homes in the area.
  • Income - For income properties (such as rentals), the process of "capitalization" is used to assess its income potential.

"Ad Valorem" Taxes

Some taxes are based on a proportion of the value of the property being taxed. These are known as "ad valorem" taxes. To arrive at an accurate amount of tax, an appraisal of the taxable subject matter's value needs to be done periodically. When the property owner's property value changes, so does their assessed or appraised value. Most property taxes are this ad valorem variety. Ad valorem property taxes are based on ownership of the property. Property owners must pay these taxes whether they actually use the property or not or whether it generates income for them or not.

Propety Tax Basics: Taxing Authorities and Collection

Generally, responsibility for the three phases of property tax -- levy, appraisal, and collection -- rests almost exclusively on the taxing authorities within local governments. A taxing authority like a county, city, town, hospital, refuse collection, school, or other special district, is a legal entity of the government with elected or appointed officers who serve a distinct geographic area.

Both state and local government agencies are authorized to levy taxes, but the way they conduct assessments, collection, and compliance can differ widely. In some states, a single state agency has primary responsibility for obtaining all appraisals, making assessments, and collecting taxes. In most states, certain agencies assess some or all railroads and utilities properties. Keep in mind that there may be opportunities to challenge the way your property is valued in some instances.

Get a Free Assessment of Your Property Tax Concerns

If you're planning to buy a house but want a better understanding of your property tax obligation, or have any other concerns regarding property taxes, it's often best to speak with a tax professional. They can help spot issues before they become bigger problems and help you get some peace of mind. Get started today with a free evaluation of your property tax issues.

Next Steps

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