What Taxes Do You Pay on a Home?

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If you’re looking to purchase your first home, the process may be a little intimidating. From down payments to HOA fees to utilities, the list of financial parts of the puzzle to worry about may feel unending. And, if you’re currently renting an apartment, there’s one new piece to factor in, as well – property tax.

What exactly is property tax, and where does that money go? Are you paying too much? How can you estimate what your new house will cost you in taxes each year? For anyone worried about these questions and more, here’s a quick overview of how property taxes work and how to ensure you’re not overpaying on your new home.

What Taxes Do You Pay on a Home

What are property taxes, and where does that money go?

A property tax is money paid each year to your local government, based upon the value of your property. Homeowners pay this tax on their home each year, but so do businesses and anyone who owns vacant land.

Your property taxes go directly to bettering your community. This means those funds go toward the fire department, police department, EMS, and garbage collection. They also go toward things like fixing roads, maintaining water and sewage, etc.

How are they calculated?

The taxes are calculated using a simple equation: Assessment x tax rate = tax.

First, you’ll look at the value of your property, including any land you own as part of your home. In the same neighborhood, if two homes were identical in value, you’d pay a higher property tax on the home on two acres of land vs. one on 0.3 acres, for example. A professional will assess your property and look at both the market value of your home and the assessed value. These numbers may be equal or the assessed value may be lower, depending on where you live. The assessed value will be the amount you pay taxes on, so no matter what you purchased your home for, the amount you’ll pay tax on is what it’s worth, not what the market says it’s currently worth. If you’re wondering, “what is my home worth?” when looking at a new property, you can check online estimates before purchasing.

Then, you’ll look at the tax rate in your county, which is determined by both your local district and your state. This number can be anywhere from a fraction of a percentage, up to just under 2.5% in some areas (we’re looking at you, New Jersey). Multiply the assessed value of your home by that tax rate, and there you have it! That’s what you’ll pay in yearly property taxes.

What if I’m paying too much?

Depending on where you live, you may qualify for an exemption. For example, you may pay less on your main residence than you would on an investment property you rent out, or a vacation home you use during a small portion of the year. You may also be able to lower your taxes if you’re a veteran or if you suffer from a disability.

You can also dispute your property tax if you find information used to assess your property was incorrect. Contact your local assessor’s office to discuss any faults you find in your assessment letter once you receive this document, as many areas only offer a short window to file a dispute. You may find a clerical error stating that your home has more bathrooms or bedrooms than it truly has, or your home may have been assessed prior to renovations. If the previous owners demolished their two-car garage and never got around to replacing it, your home may be worth less than the last time it was assessed, and therefore, you should be paying less in taxes.

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