Start Planning to Stay Ahead of your Taxes
Buying real estate can be an exciting time if you plan for it. One of those things to plan for is taxes. In this article, we’ll discuss everything about real estate taxes; this includes tax rates, valuation (market value, assessed value), assessment process, exemptions, and incentives.
Land Transfer Tax
When you buy a home, you are normally required to pay a land transfer tax. Land transfer tax is usually paid to your state and municipality. It goes toward paying for some of the services mentioned below that real estate property taxes cover, which we’ll discuss in greater detail in the next section.
Land transfer tax can be a flat amount, but it’s almost always based on the purchase price of your home. Generally, the higher your home’s purchase price, the more you’ll be by way of land transfer tax. Sometimes if your home is purchased for an amount below a certain threshold, you may not need to pay land transfer tax at all.
If you’re a first-time home buyer, you’ll want to check if there are any incentives or tax breaks.
Real Estate Property Tax
But that’s not the end of the story. Once you own a home, you must pay taxes just for the luxury of owning it.
If you live in a city or town in the United States, you most likely pay property taxes. Pretty much every American who is also a homeowner pays property taxes. Property taxes are vital to your city or town. Without them, your city or town could fall into a state of disrepair and become safe.
What do Property Taxes Pay For?
Property taxes pay for several important services. Those include public transit (buses, subways, etc.), public libraries, police, firefighters, and paramedics.
Those also include garbage removal (nobody enjoys hauling garbage to the dump). If you’re in a colder climate, it can include snow removal. Without adequate snow removal, people couldn’t safely get around, which could cost them their lives.
Many of us take clean, safe drinking water for granted. However, if we didn’t pay our fair share of property taxes, we most likely wouldn’t have that luxury. Our property taxes go towards the treatment and supply of water.
Our property taxes also pay for city services such as swimming lessons, tennis courts, and ice-skating rinks.
That’s not all. Our property taxes help cover child services, road repairs, and social housing.
These are just some of the many services our property taxes go towards.
Have you ever wondered how your city or town calculates your property taxes? It doesn’t just plunk the number from thin air. It uses a simple calculation to determine them.
Your city or town takes its mill rate, divides it by 1,000, and multiplies it by your home’s assessed value. That determines what your annual property taxes will be. You can often pay them in installments to make it easier to afford from a cash flow standpoint.
Property tax is also different whether your property is residential or commercial. If it’s residential, you’ll often pay different tax rates than your commercial property.
Property Taxes for Disabilities
If you are a senior or a person with a disability, there may be exemptions for property taxes. Cities and towns have these to help their more vulnerable citizens. If you fit into these categories, you may be able to have your property taxes lowered or forgo paying them altogether. You’ll want to check with the eligibility for your local city and town, as the criteria vary.
Your Home’s Assessed Value
If you’re wondering, your home’s assessed value is different than its appraised value. It is determined by the city for property tax purposes. It usually has an automated valuation system to determine your property’s value. All of that is considered, along with the features of your home and recently sold comparable properties. When your home’s assessed value is determined, you can usually appeal it if you feel it’s unfair.
Meanwhile, your home’s appraised value is used by mortgage lenders to determine how much your property is worth for mortgage lending purposes. While both are similar, they are different in this important way. Market value, how much your home could sell for, plays a part, but other factors are considered as well.
If two taxes weren't enough, there’s one final tax when you or a loved one passes away; an estate tax. An estate tax is a tax that’s required to be paid by your estate when you die and own real estate. The tax rate may be different depending on your state, but the idea is still the same.
There are ways to minimize estate taxes. For example, if the property goes to a surviving spouse, there usually isn't estate taxes to pay. However, if the home is going to your children, that’s when there are almost always estate taxes.
To help minimize estate taxes, consult with a good estate lawyer. You may be able to gift your property to your children to minimize or avoid the tax liability later.