Most people use the terms real estate taxes and property taxes interchangeably. However, while both terms cover taxes paid on real estate, property taxes include other types of assets as well. Let’s compare the differences between real estate tax vs. property tax, break down how they’re calculated and explain when they qualify for a tax deduction.
A financial advisor can help you optimize a tax strategy for your real estate investments and goals.
What Are Real Estate Taxes?
Real estate taxes are annual taxes owed on the assessed value of assets that are immovable. Taxes apply to land and permanently attached structures, like a home or building. These taxes apply to residences, office buildings, warehouses, raw land and other properties. Tax revenue from real estate taxes often funds local resources, like schools, police, EMTs, parks and roads.
How Are Real Estate Taxes Determined?
Local and state governments determine real estate tax rates and they apply them to the assessed value of the property. Generally, rural parts of the country charge lower tax rates than urban cities. For example, a home in rural Alabama will have lower property tax rates (0.41%) than New Jersey (2.49%). Real estate taxes are not paid to the federal government.
To calculate your real estate property taxes, the local assessor will multiply the local and state property tax rates by the assessed value of your property. Some property owners pay the taxes directly, while others have their property taxes paid by their mortgage company from money set aside from the monthly mortgage payment. These are known as escrow or impound accounts.
Each state and locality use different tax rates and rules to determine the assessed value of a property. The assessed value is often lower than the actual market value of the property if you were to list it for sale tomorrow. If you feel that the assessed value (and there your property tax bill) is too high, most local governments offer a process to dispute the valuation with an appraisal or other independent data.
What Are Property Taxes?
While most people only focus on real estate when talking about property taxes, other assets may also be subject to an annual tax bill based on their value. This tax bill is known as the “personal property tax” that is assessed on movable assets. Examples of moveable assets include mobile homes, RVs, vehicles, boats, planes and motorcycles.
How Are Property Taxes Determined?
Personal property taxes are calculated based on the depreciated value of the asset. Typically, the local tax assessor creates a baseline value based on the amount paid for the personal property. The assessed value usually declines each year due to expected wear and tear.
Each state treats personal property taxes differently. For vehicles, most owners pay the taxes when they “renew their tags.” When you pay these annual vehicle registration or license fees, the portion that is based on the value of the vehicle is the personal property tax.
Are Both Types of Taxes Deductible?
Depending on your tax situation, you may be able to deduct some or all of your real estate taxes and personal property taxes. Real estate taxes are generally considered tax-deductible. Personal property taxes may be deductible if they are based on the asset’s value, not its size, age or some other characteristics. In both situations, you must itemize in order to tax the deduction.
After the 2017 Tax Cuts and Jobs Act, many taxpayers started using the standard deduction because the standard amount was higher than their itemized deductions. Previously, it was advantageous for many property owners to itemize. When they combined mortgage interest, property taxes, state income taxes and other eligible deductions, it was a powerful deduction. Now, itemizing is less attractive and often only used by taxpayers with larger or more complex tax bills.
Additionally, this new tax law limited the “state and local tax” (SALT) deductions to $10,000 per year. The decision to itemize or not is more challenging for taxpayers that live in high state tax areas, own larger homes or both. Tax preparers often calculate their returns both ways to determine which is more advantageous.
State and local governments tax a wide variety of real estate and personal property. This revenue funds community budgets for police, parks, roads and more. Many homeowners pay property taxes through their mortgage payments, but others pay them directly. Personal property, like cars, boats and RVs, also has an annual tax. These taxes are usually paid through registration or license fees each year. Your ability to deduct these taxes depends on whether you itemize or take the standard deduction and the SALT deduction limits.
Tips for Paying Property Taxes
- A financial advisor can help you create a tax plan for your real estate investments. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Property tax bills can change on an annual basis based on the value of the properties that you own. To see the latest rates and forecast your annual property tax bill, use our property tax calculator. This tool is also helpful if you’re planning to buy a new home. By entering your new home’s details, it provides an estimate of the potential property tax bill.
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