Real Estate Taxes vs. Property Taxes: An Overview
If you own a home, you’re likely familiar with real estate taxes. You may even call them property taxes since the terms have become interchangeable. Many people may not realize the two taxes are not identical.
Real estate taxes are the taxes you need to pay on the assessed value of your home that the municipality in which you own your property charges you. Personal property taxes are the taxes on moveable items you own, such as cars, boats, equipment, and furniture.
Key takeaways
- Though the terms real estate taxes and property taxes are sometimes used interchangeably, they mean different things.
- Real estate taxes are the amount of money the municipality you live in charges you for the assessed value of your home.
- Personal property taxes are assessed on moveable items such as cars, campers, boats, and business machinery, equipment, or furniture.
Real Estate Taxes
Real estate taxes are annual taxes a homeowner must pay on the assessed value of their house. Every city and state municipality determines how much the real estate tax rate is by multiplying the fair market value of a home by the predetermined percentage in that municipality to arrive at the tax assessment value.
Ever hear people complain about the high cost of real estate taxes in their area? This is what they’re referring to, and higher tax rates are often found in large cities like New York or Los Angeles.
The amount of real estate taxes you pay will depend on how much your home is valued as well as the part of the country you live in. For example, a rural city in Oklahoma likely has a way lower real estate tax rate than a popular big city on say, one of the coasts or in a major metropolis like Dallas or Chicago.
How Real Estate Taxes Are Determined
Let’s say your house has a fair market value of $350,000 and the predetermined percentage in your municipality is 65%, the tax assessment value of yourhome is $227,500, or $350,000 x 65%.
If your local tax rate is 3%, then you would pay $6,825 in real estate tax per year. If your local tax rate was higher, say 8%, you’d pay $18,200 on a similarly valued home in another locale. Location, location, location.
Property Taxes
Property tax is another name for personal property tax. Your personal property refers to items that aren’t permanent or items that are movable. For example, your car is personal property and when you register it every year, you’re essentially paying a property tax on it.
Things like boats, planes, campers, RVs, ATVs, farm equipment, and business equipment like furniture or machinery are taxed under personal property. Since they’re all moveable, a personal property tax is assessed on their value, similarly to the way your home’s tax value is assessed.
It is interesting to note that mobile homes are taxed as personal property rather than real estate. It is true that people live in them just as they would in a house, but technically, they’re moveable; however, if you own the land that you have a mobile home on, it would be taxed under real estate taxes on its assessed land value.
How much you pay for your personal property tax on these items also depends on your city and municipality, and the going personal property tax rate as well as how much assessed value each personal item is worth.
Key Differences
First, the rate of taxes that you pay is different. Suffice it to say that real estate taxes are much steeper than personal property taxes. For example, vehicle property taxes will incur you a few hundred dollars depending on the state.
A home is assessed at a much higher value with a much higher tax rate. Even the cheapest real estate taxes in the country for a modestly valued home would likely be thousands of dollars.
Second, you may be able to deduct real estate taxes on your home as expenses on your federal tax return if you live in the home and itemize deductions on Schedule A. Personal property taxes may also be deducted if you itemize, but the deductions will be a lot less on a boat or RV than they would on your home and go in a different place on your federal return.
This is not only because your personal property typically has less value than a home but also because it’s taxed at a lower rate than real estate taxes.
What State Has the Highest Property Tax?
New Jersey has the highest property tax of any state with an average effective property tax of 2.21%. Illinois is the second-highest with an average rate of 2.05%.
What State Has the Cheapest Property Tax?
The state with the lowest property tax is Hawaii with a property tax rate of 0.27%. After Hawaii is Alabama, with a property tax rate of 0.39%.
What Is Real Property?
Real property is generally considered to be structures that are built on land or above or under land, or affixed to land. These structures are permanently installed.
The Bottom Line
Although they sound similar, real estate taxes and personal property taxes refer to different types of tax. Your municipality charges an amount of money based on the assessed value of your home: the real estate tax. Moveable items—vehicles, business equipment, furniture—are taxed at a different rate, the rate for personal property.
One item that may be taxed as personal property rather than real estate might seem confusing. If the owner of a mobile home does not own the land the home is on, that mobile home will be considered personal property. If the mobile homeowner owns the land, then the land is assessed for real estate tax.
Now that you understand the difference between real estate taxes and personality property taxes, you may be less likely to use the terms interchangeably and more apt to understand the tax statements and bills you receive for each one.
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Moving on to property taxes, the article clarifies that this term is another name for personal property tax. I can expand on this by emphasizing that personal property taxes apply to movable items such as cars, boats, equipment, and furniture. The mention of mobile homes being taxed as personal property, unless the homeowner also owns the land, aligns with my extensive understanding of real estate taxation nuances.
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