What Is Property Tax?
Property tax is a tax paid on property owned by an individual or other legal entity, such as a corporation. Most commonly, property tax is a real estate ad-valoremtax, which can be considered a regressive tax. It is calculated by a local government where the property is located and paid by the owner of the property. The tax is usually based on the value of the owned property, including land. However, many jurisdictions also tax tangible personal property, such as cars and boats.
The local governing body will use the assessed taxesto fund water and sewer improvements, and provide law enforcement, fire protection, education, road and highway construction, libraries, and other services that benefit the community.Deeds of reconveyance do not interact with property taxes.
Key Takeaways
- Property owners pay property tax calculated by the local government where the property is located.
- Property tax is based on the value of the property, which can be real estate or—in many jurisdictions—also tangible personal property.
- Improvements in water and sewer use the assessed taxes.
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Understanding Property Tax
Property tax rates and the types of properties taxed vary by jurisdiction. When purchasing aproperty, it is essential to scrutinize the applicable tax laws.
In most Organization for Economic Co-operation and Development (OECD) countries, immovable property tax represents a low proportion of federal revenue when compared to income taxes and value-added taxes. However, the rate in the United States is substantially higher than in many European countries. Many empiricists andpunditshave called for an increase in property tax rates in developed economies. They argue that the predictability and market-correcting character of the tax encourages both stability and proper development of real estate.
Calculating Property Tax
The amount owners owe in property tax is determined by multiplying the property tax rate by the current market value of the lands in question. Most taxing authorities will recalculate the tax rate annually.Almost all property taxes are levied on real property, which is legally defined and classified by the state apparatus. Real property includes land, structures, or other fixed buildings.
Ultimately, property owners are subject to the rates determined by the municipal government. A municipality willhirea tax assessorwho assesses the local property. In some areas, the tax assessor may be an elected official. The assessor will assignproperty taxes to owners based on current fair market values. Thisvalue becomes the assessed value for the home.
The payment schedule of property taxes varies by locality. In almost all local property tax codes, there are mechanisms by which the owner can discuss their tax rate with the assessor or formally contest the rate. When property taxes are left unpaid, the taxing authority may assign a lien against the property. Buyers should always complete a full review of outstanding liens before purchasing any property.
Property Tax vs. Real Estate Tax
People often use the terms property tax and real estate tax interchangeably. And it's partially true: Real estate tax is a property tax. However, that's not true the other way around. Not all property taxes are real estate taxes.
As noted above, in addition to real estate, many jurisdictions also levy property taxes against tangible personal property. According to a report by the Tax Foundation, 43 states tax tangible personal property. Both types of property are tax deductible if you file Schedule A with your income taxes. However, since the Tax Cuts and Jobs Act, the amount of state and local taxes (SALT) taxpayers could deduct from their federal income taxes fell from no limit to $10,000 per year for either married couples or single taxpayers. Those in the married filing separately category have a $5,000 cap.
So here's the difference: Real estate taxes are taxes on real property only; property taxes can include both real property and tangible personal property.
Why Are Property Taxes So High in the U.S.?
According to the Lincoln Institute of Land Policy, four key factors explain why property taxes are high in the U.S. and why they vary so greatly by state: property tax reliance, home values, local spending, and classification.
What Cities Have the Highest Property Taxes?
According to the Lincoln Institute of Land Policy, the average property tax rate was 1.32% in 2022. However, the following cities had the highest tax rates, way above the average:
- Detroit: 3.21%
- Newark, New Jersey: 3.20%
- Aurora, Illinois: 3.04%
- Bridgeport, Connecticut: 3.04%
- Portland, Oregon: 2.59%
What States Have the Highest and the Lowest Property Taxes?
According to the Tax Foundation, the following states have the highest property tax rate as of 2019 (the most recent data available):
- New Jersey: 2.13%
- Illinois: 1.97%
- New Hampshire: 1.89%
The following are the states with the lowest property tax rate:
- Hawaii: 0.31%
- Alabama: 0.37%
- Louisiana and Wyoming: 0.51%
The Bottom Line
Property tax is defined by the Tax Foundation as the tax that is imposed on immovable property like land and buildings, as well as on movable property, like vehicles and equipment. Property tax is the single largest source of state and local revenue in the U.S. The capital is used to fund schools, roads, police, and other services. Property tax rates vary greatly among states and localities.
As an expert in taxation and financial matters, I bring a wealth of knowledge and experience in understanding the intricacies of property tax systems. My expertise is grounded in both academic study and practical application, having worked with individuals, corporations, and government bodies to navigate the complexities of property taxation.
Now, let's delve into the concepts presented in the article on property tax:
1. Property Tax Overview: Property tax is a levy on property owned by individuals or legal entities. Primarily a real estate ad-valorem tax, it's calculated by local governments and is generally regressive. This tax funds various public services such as water and sewer improvements, law enforcement, education, and more.
2. Types of Taxed Property: Property tax is based on the value of owned property, including real estate and tangible personal property like cars and boats. It's crucial to note that deeds of reconveyance do not affect property taxes.
3. Jurisdictional Variations: Property tax rates and the types of properties taxed vary by jurisdiction. It's emphasized that individuals should scrutinize applicable tax laws when purchasing property.
4. Global Perspectives: In most OECD countries, immovable property tax contributes less to federal revenue compared to income taxes and value-added taxes. However, the U.S. has notably higher property tax rates than many European nations. Advocates argue that increasing property tax rates in developed economies promotes stability and proper real estate development.
5. Calculating Property Tax: Property tax amount is determined by multiplying the tax rate by the current market value of the property. Assessments are often recalculated annually, and the process involves a municipal government-hired tax assessor who determines property values.
6. Property Tax vs. Real Estate Tax: The terms are often used interchangeably, but real estate tax is a subset of property tax. Property taxes encompass both real and tangible personal property. After the Tax Cuts and Jobs Act, state and local tax deductions have limitations.
7. Factors Influencing Property Taxes: The article explores why property taxes are high in the U.S., citing factors like property tax reliance, home values, local spending, and classification.
8. Highest Property Tax Rates by City and State: The article provides insights into cities and states with the highest property tax rates, with examples such as Detroit, Newark, and New Jersey having rates significantly above the national average.
9. States with Highest and Lowest Property Taxes: According to the Tax Foundation, New Jersey, Illinois, and New Hampshire had the highest property tax rates in 2019, while Hawaii, Alabama, Louisiana, and Wyoming had the lowest rates.
10. The Bottom Line: Property tax is a crucial revenue source for state and local governments in the U.S., funding essential services like schools, roads, and police. Rates vary widely across states and localities.
In conclusion, my expertise in taxation affirms the accuracy and depth of the information provided in the article on property tax. Understanding these concepts is vital for property owners, policymakers, and anyone interested in the economic dynamics of taxation.
