How to Determine Your Land and House Taxes?
“Know your worth. Then add tax.”
If you have even one social media account, you’ve likely seen some version of that saying at least a few times. It’s aimed at sole proprietors and small businesses that may not always charge what their products and services are actually worth. It’s also a lesson that we can all learn from federal, state, and county tax agencies.
The tax man has no problem assessing the value of your property and sticking out his hand for every penny of that value. If you own a home or are hoping to purchase real estate in the future, you need at least a basic understanding of land and house taxes.
That knowledge will help you decide which property to buy and may save you money if mistakes are made in your taxes during your years of ownership. Keep reading to learn how to determine your land and house taxes whether you’re shopping for a new home or already own real estate.
Land and House Taxes 101
Let’s start with a clear understanding of what property taxes are and why all homeowners have to worry about them. Land and house taxes are a category of property tax that applies only to houses and lots of land. These taxes can apply to commercial and residential properties and are a bit more complicated than sales tax or income tax.
Local governments collect property tax on every home or land lot within their jurisdiction. Land and house taxes are a significant source of income for most counties and cities, and you can expect to have taxes due every year that you own property. You’ll receive a tax bill for every lot of land or home that you own, including rental properties and vacation homes.
That doesn’t mean your home will receive a fresh assessment and valuation every year. Every local government has its own schedule for evaluating property, and you can expect the amount you pay in taxes to change with each new assessment. Some factors that may cause fluctuations in your tax bill include the value of your home, local tax rates, and market values for homes in your local area.
If you fail to pay your property taxes, you could lose your home. Even if you pay off your mortgage and own your property outright, you will still pay taxes every year. If you do have a mortgage, your house payments may include your taxes so that you don’t have to think about taxes as a separate bill.
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How to Find Property Taxes by Address
How do you find out how much your property taxes are if you already own your home or land? You should receive a property tax statement that contains a breakdown of your payment each year that you own a property. If you still have questions or haven’t received a tax statement or bill, you can contact your city or county.
What if you’re considering a home for purchase but want to see the tax values and estimated annual payments before closing? There are a few online resources that you may use for personal tax management purposes. These are great resources to use during the home shopping process, but they may come in handy for homeowners as well.
Use a Local GIS System Online for Tax Value
A Geographical Information System, otherwise known as GIS, is a computerized display of a geographical area. Many counties and cities maintain virtual GIS representations of every property within their vicinity. If you find the GIS for your area, you can enter the property’s address to see the property lines and last assessed value. For more on what “assessed value” means, look at the terminology section featured below on this page. We’ll also discuss how assessed value is used to determine your tax payments each year.
The GIS for your area won’t tell you how much you’ll pay in taxes each year, but they can give you a clear representation of property lines and current assessed value of a home.
Look at the Tax Overview on Zillow
Go to Zillow.com and type the address into the search bar. You’ll see basic information like the number of bedrooms and bathrooms along with a tax history. That history will show you the assessed value for the home for each year on record along with the amount the homeowner paid in taxes. You can look up homes whether they’re on the market or not, and it’s free.
Use a Paid Property Tax Database
If you can’t find the information you need through GIS or Zillow, there are paid property tax databases like Property Shark that may help. Information for some properties is free while other properties require a fee.
Property Tax Terminology
Before we discuss how land and house taxes are calculated, familiarize yourself with some of the financial terminology involved.
Appraised Value
When your county or city sends an assessor to your property to determine the value of your home, they’re determining the appraised value. This refers to the perceived value of the property as it stands today.
When you make improvements to your home or build on a lot of land, you increase the appraised value of the property. The appraised value may also fall if the property isn’t well maintained.
Mass Appraisal
Many counties and cities use mass appraisal when determining the appraised value for properties. Instead of going to every property individually, they create one appraisal value for specified areas. Characteristics of your home and the zip code or other location markers are used to determine the value assigned to your home or land.
Market Value
The market value of a property is determined by a variety of factors beyond the property itself, including the selling price and appraisal value of other homes in the surrounding area. Supply and demand and other real estate trends for the local area may have an impact on the fair market value as well.
Think of this as an estimate of what a buyer may fairly pay for the property at any given time. It’s not an exact science, so you won’t always get the market value you see online or that is quoted by a real estate agent.
Assessment Ratio
Your city or county divides all property into tax zones and then determines the percentage of the appraised value that is taxable. For some areas, the full appraised value is used when calculating land and house taxes. Other tax zones will use a percentage, which results in lower tax bills for all properties within the zone.
You may see your tax zone and assessment ratio through your local GIS online. You can also contact your county or city if you want to know what percentage of your appraised value is used to calculate your tax bill.
Market Value vs. Assessed Value
We already discussed the definition of market value, but how does assessed value compare? The assessed value is your appraised value multiplied by your assessment ratio. The assessed value is what your county will use to determine the amount you see on your tax bill each year. Market value is used more in real estate to determine the fair sales price for a property.
For example, if 40% of your appraised value is used to determine your land and house taxes and your appraised value is $100,000, your assessed value is $40,000. How did we get that figure? We multiplied $100,000 by 0.40.
Tax Rate
The tax rate is set by your city, county, or other local taxing agency to determine how much you will pay each year for land and house taxes. The rate can change from year to year and often varies by zip code or other area designations. The market values in your area may come into play when the tax rate is set for your property, but other factors apply as well.
It’s a good idea to check tax rates for each property you consider buying. It can make a substantial difference in what you pay each year either out of pocket or as an addition to your monthly mortgage payment.
How are Property Taxes Calculated? A Step-by-Step Tutorial
If you read through the property tax terminology above, you may see how all of those pieces come together to determine the figure you see on your property tax bill each year. The calculation process may vary a little by state, but most states follow the same basic rules.
It comes down to the following steps:
1. The Appraised Value Is Determined by an Assessor
This is either through an evaluation of your property alone or mass appraisal for your area. Each time a new appraised value is assigned, your land and house taxes can change.
2. I) If Your Assessment Ratio is Less Than 100%:
Then the assessed value for your property is calculated. This is done by multiplying the appraised value of the property by the assessment ratio, which is expressed as a percentage. See the terminology section above for a more detailed explanation of the assessment ratio.
2. II) If Your Assessment Ratio Is 100%:
In that case, the appraised value doubles as your assessed value for land and house tax purposes. For most homes, the assessed value is less than the market value and appraised value. How much less depends on the type of property you own and where it’s located.
3. The Assessed Value of Your Property Is Multiplied
It is multiplied by the tax rate for your area to determine what you owe in taxes for the year.
If you want to learn how property taxes are calculated in your state, county, or city, look up the tax authority for your state or local area. Most now offer a detailed breakdown of the process they use to determine property taxes due each year. They may also help you determine when your property is up for a new assessment or when property tax rates might increase for your tax zone.
Why Do Land and House Taxes Vary by Area?
Now that you understand how land and house taxes are calculated, you may see why some zip codes are known for having much higher property taxes than others. If you’re looking at two homes just blocks apart, you may notice that one comes with much higher property taxes than the other. That happens when the homes are close geographically but fall into different tax zones.
Some factors that can raise taxes for a given area include:
Property Improvements
Home improvements can increase the fair market value of your home, allowing you to profit more when you sell. Those same improvements can increase the appraised value of your home and lead to higher tax bills.
If you’re worried about high property tax bills, look properties up online to determine the estimated taxes before you buy land or a home. Even if you’re shopping for an investment property or second home, the taxes can make the difference between an affordable home and a home that is out of your financial reach.
Substantial Investments in Local Schools, Fire Departments, And Other Services
Your land and house taxes pay for a variety of local services provided by your city or county. Some local governments invest a lot more in these services than others, and it makes a difference in what you pay in property taxes. While it’s great to live in an area with exceptional public schools, you’ll likely pay for those schools through your taxes each year.
High Land and Home Values
The property in the tax zone is worth more than the average value of property in other zones. Higher appraised values result in higher assessed values, which result in higher tax prices for all homeowners.
How to Use a Property Tax Calculator
Many states now offer property tax calculators that make it easy to calculate estimated land and house taxes in just a few minutes. A great example is a calculator offered by the Michigan Department of Treasury. You will need the following information to use that calculator:
Assessed tax value
County
City, village, or township
School district
You simply fill in each field on the calculator and allow the website to do the work for you. Each calculator is set up to automatically know the tax rates for each local area. The exact information requested by the calculator can vary from state to state.
To find your state’s property tax calculator, look up the state’s department of treasury or department of finance online and use the search bar. Not all states may have calculators available, but it’s worth looking if you’re not thrilled about running the numbers and looking up tax rates online personally.
How to Prepare for Land and House Tax Payments
Land and house property taxes are different than income taxes. You don’t have to worry about a complicated tax code that requires you to jump through hoops to pay as little as possible. While you may spend time working through a tax prep checklist for income taxes, all you need to track for property taxes is your local tax rate.
You don’t even have to worry about tax audits or refunds. Once you buy your property, you will simply receive a bill with the exact amount you owe each year. You don’t have to figure out what you owe and hope it’s right. If you follow local politics, you can even vote for tax levies that might increase your property taxes in the future.
Preparation Steps:
While property taxes are less complicated than income taxes, there are some things you should to do prepare for land and house taxes after you purchase a property:
1. Decide if you want to include property taxes in your mortgage payment or pay out of pocket each year when the bill arrives in your mailbox. While including taxes in your mortgage payment will increase your monthly payments, it eliminates the headache of paying a large bill all at once.
2. Look up the estimated property taxes for every property you consider buying. It’s always better to make sure the taxes are affordable upfront than to experience sticker shock when the first bill hits your mailbox or your mortgage payment comes out much higher than expected.
3. When shopping for homes in excellent school districts or in upscale and prestigious neighborhoods, think about the impact it will have on your land and house taxes. It’s a delicate balance to find a home in the right neighborhood without paying too much for taxes.
To Conclude,
Bookmark this guide so that you have the resources you need to calculate land and house taxes in the future. If you’re shopping for a new home right now, you’ll need this information to compare estimated property taxes for each property that you consider.