What Are Property Taxes and How to Budget for Them
Property taxes are essential to owning real estate, as they help fund vital services such as schools, roads, public safety, and parks. Understanding property taxes and budgeting for homeowners is crucial to avoid any financial surprises down the road. This article will provide an overview of property taxes and offer effective budgeting tips.
1. What Are Property Taxes?
Property taxes are levies local governments impose on real estate properties, including land and buildings. These taxes provide significant funding for local government services such as education, infrastructure, and public safety. The property tax amount depends on a property’s assessed value, which a local tax assessor usually determines.
2. How Are Property Taxes Calculated?
Property taxes are calculated based on two main aspects: the assessed value of the property and the local tax rate. The assessed value is an estimate of a property’s market value, which is determined by the local tax assessor using factors such as location, size, age, and improvements made to the property. The local or mill tax rate is a percentage applied to the assessed value. To calculate your property tax bill, multiply the estimated value by the mill rate and divide by 1,000.
3. How to Budget for Property Taxes
Homeowners must budget for property taxes to ensure they can comfortably cover this expense. Here are some tips to help you budget for property taxes:
a. Research Local Property Tax Rates
Before purchasing a property, research the local property tax rates in your desired area. You can often find this information on your county or municipality’s website or by contacting the local tax assessor’s office. Knowing the tax rate can help you estimate your annual property tax bill.
b. Escrow Accounts
An escrow account is a completely separate account that holds funds for property taxes and homeowner’s insurance. Many mortgage lenders require borrowers to establish an escrow account, which allows them to pay their property taxes and insurance premiums as part of their monthly mortgage payment. This helps to spread the cost of property taxes and insurance over 12 months, making it easier to budget.
c. Set up a Savings Account
If you’re not required to have an escrow account, consider setting up a dedicated savings account for your property taxes. Determine your estimated annual property tax bill, divide it by 12, and deposit that amount into the account each month. This will help ensure you have the funds available when your property tax bill comes due.
d. Regularly Review Your Property Tax Bill
Monitor your property tax bill, as assessed values and tax rates may change over time. Regularly reviewing your account will help you stay informed about any changes and allow you to adjust your budget accordingly.
4. Appealing Your Property Tax Assessment
You can appeal the assessment if you believe your property’s assessed value is too high. Each jurisdiction has its appeal process. It typically involves gathering evidence of comparable properties with lower estimated values and presenting this information to the local tax assessor’s office or a review board. Successfully appealing your property tax assessment can result in lower property taxes.
Understanding property taxes and budgeting for them is essential to responsible homeownership. By researching local tax rates, using escrow accounts or setting up a dedicated savings account, and regularly reviewing your property tax bill, you can ensure you’re well-prepared to manage this significant expense.