Property tax is a tax paid on property owned by an individual or other legal entity. It is collected by local governments and usually based on the value of a property. The money collected through this tax is generally used to support community safety, schools, infrastructure, and other public projects. Property tax rates and the types of properties taxed vary by jurisdiction. Therefore, when purchasing a property, it is essential to explore the applicable tax laws.
Jurisdictions in all 50 states and the District of Columbia impose property taxes. Most property tax revenue comes from local levies on land and improvements to it, but some states also tax personal property, such as equipment and motor vehicles.
Assessing Property Tax
Property tax rates are different across the states, making them difficult to compare. In addition to these variations, local governments use different methods to calculate their real property tax base.
The taxing jurisdiction typically assesses the real property value by estimating what the property would sell for in a transaction. While some jurisdictions base value on the last sale price or acquisition value of the property, others consider the income that property could generate or the size and physical attributes of the property. For example, if there is access to public services, such as sewer, water, and gas, the property assessment might be higher.
Since property taxes are a major source of income for city and county governments, different boards, councils, and legislatures meet to decide the appropriate rates. They also determine how much money needs to be allocated for providing the various services required by the local community and these services are funded by property taxes.
State and Local Tax (SALT) Deduction
The Internal Revenue Service offers a deduction for amounts paid toward sales tax, income tax, or property tax. Before the Tax Cuts and Jobs Act was enacted in 2017, there was no limit to how much taxpayers could deduct for SALT taxes. Beginning in the tax year 2018, the deduction is capped at $10,000 for all SALT income, property, and sales taxes combined.
The SALT deduction allows taxpayers to deduct up to $10,000 of state and local property taxes in addition to state income or state sales tax, but not both. The combination taxpayers choose to deduct depends on specific circumstances and what benefits them most.Use this comprehensive guide to understand property tax return preparation and filing, and ensure compliance with different jurisdiction-specific rules.
Calculating Property Taxes
Property taxes are calculated using the value of the property, including both the land and the buildings on it. Tax assessors calculate the value using the mill levy, or the millage tax, and the assessed property value.
The mill levy is the tax rate levied on a property value, with one mill representing one-tenth of one cent. So, for $1,000 of assessed property value, one mill would be equal to $1.
Tax levies for each tax jurisdiction in an area are calculated separately. After this, all the levies are added together to determine the total mill rate for an entire region. As a result, cities, counties, and school districts have the power to levy taxes against the properties within their boundaries.
Property taxes are calculated by taking the mill levy and multiplying it by the assessed value of the owner’s property. The assessed value estimates the reasonable market value of a property and it is based upon prevailing local real estate market conditions.
The assessor can estimate the market value of a property by using three different methods:
- Sales Evaluation – Property value is based on comparable sales in the area. This includes location, the state of the property, improvements, and the overall market conditions, and potential changes to the property, such as new additions and renovations.
- The Cost Method – In this case, the property value is based on how much it would cost to replace it. This approach is most appropriate when assessing new and unique or specialized property. It is also useful when there are no meaningful sales of comparable properties.
- The Income Method – Under this method, assessors estimate the amount of income from a piece of property if the property is used to produce an income. Using this approach, the assessor considers the costs of maintaining the property, managing the property, insurance, and taxes, as well as the return that can be reasonably anticipated from the property.
Understanding Property Tax
Property tax can be confusing and paying the right amount requires understanding how the tax is calculated, where to get this information, and when tax bills are sent out and due. Therefore, property owners should make sure to understand how property tax works despite it being a tedious and time-consuming process. On the other hand, automating property tax management simplifies document processing, asset classification, return filing, and tax bill processing and payment. As a result, software applications can increase productivity and improve the accuracy of data, create a returns process that can be fully audited, generate error-free tax documents, and prevent penalties associated with late payments. At the same time, taxpayers can remain compliant with different jurisdiction rules by automatically categorizing assets and allocating them to specific jurisdictions, and calculating the taxability and reportability of each asset.