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How Property Taxes are Calculated on a New Home

Buying a new home is incredibly exciting. It’s also a lot to think about, particularly in terms of budgeting and financing. And one of the big financial factors that you have to consider are property taxes, particularly how property taxes are calculated on new homes and what you can expect to spend each year.

Homeowners—and especially new homeowners—are often confused about property taxes, and understandably so. If it’s your first time buying a house, you likely aren’t familiar with property taxes, and depending on where you live, you may be surprised to learn just how much they are (sorry, New Jerseyans). But it’s crucial that you calculate property taxes prior to making a new home purchase so that you can get as accurate of an idea as possible about what your monthly and annual home-related expenses will be.

Feeling a little bit overwhelmed? We hear you. To help you out, we’ve put together this quick property tax explainer for new homebuyers, including information on how property taxes are calculated and why you need to pay them in the first place.

What Are Property Taxes?

Property taxes—sometimes referred to as millage taxes—are a tax levied on property (most typically real estate property) by county governments. Because the rates are determined county by county, you’ll find a pretty large variance in property tax rates across the country, from averages as high as 1.89% (New Jersey) to averages as low as 0.18% (Louisiana). These rates are percentages of your home’s assessed value, meaning the higher the value of your home, the more you’ll have to pay.

What Do Property Taxes Pay For?

Nobody likes to pay a big tax bill, but if it’s any consolation, your property taxes go to some pretty important things. This includes schools, roads, police forces and other public safety initiatives, libraries, and local government salaries.

How Property Taxes are Calculated

Your local property tax rate is applied to the assessed value of your home in order to come up with the amount that you owe. In each jurisdiction, a local taxing authority sets a rate that each home will be taxed at. You may see this rate referred to as a mill rate or a millage rate. This rate can (and often does) change from year to year, and is based on the needs of the local city and county governments, as well as the needs of local school districts.

The first step in how property taxes are calculated is coming up with the assessed value of a home, which is different from its market value. Some states calculate the assessed value of homes differently. In California, for example, a home’s assessed value is based on its purchase price. Other states assign the assessed value as a percentage of a home’s market value, or by using other predetermined methods.

To figure out how property taxes are calculated on a home before you buy, look up the most recent assessed value of the property (most counties assess homes every other year) and the current property tax rate—then do the math (your assessed value x your property tax rate = the amount you’ll owe in property taxes). To make it simple, use a property tax calculator like the one provided by SmartAsset.

This amount is usually owed either annually or semi-annually, and is generally split up over two payments. Note that your lender will collect money toward your property taxes in escrow, so this annual payment likely won’t be all out of pocket. In fact, some lenders just wrap your annual property taxes into your monthly mortgage payment, so you pay toward it every month regardless.

How Your Home’s Value is Determined for Property Taxes

County tax assessors don’t just look at the sale price of your home to figure out what its value is. Instead, they do their own valuations taking into account things like square footage, acreage, home features, the home’s age, and so on. With new build homes, things like construction material and labor costs are often taken into account as well.

There are other methods a tax assessor may use to value your home as well. This includes the income method, which bases the value off of how much you could make on the home if it were rented out (accounting for maintenance and management costs), and the sales evaluation method, which heavily prioritizes community features and local market trends.

Talk to your realtor to find out how property values are assessed for tax purposes in your locality. In addition to giving you some insight there, your realtor should also be able to clue you in on the property tax history of the home you are buying, as well as information on how property tax rates have changed over time in your area.

Think the assessed value of your home is incorrect? You can appeal it. Reach out to your local taxing authority for information on how to do so.

Putting Property Taxes Into Perspective

Knowing what you’ll likely be paying in property taxes every year is just as important as knowing what your monthly mortgage payments are going to be. That’s because determining ancillary costs—everything from taxes to utility bills to estimated home repair and maintenance costs—is necessary for figuring out what you can actually afford. Divide your property taxes by 12 to put them into perspective alongside your monthly mortgage payments, and try to ensure that this total is no more than 25% of your net income every month.

If you’re interested in buying a home, consider its attached property taxes to be as instrumental in your decision making as its asking price. You may also want to use property tax rates to guide which counties you look to buy in, since something as simple as moving to the next zip code could mean big tax savings.

7FinancialBenefits

Indeed, there’s no place like home. Freshen up on the 7 financial benefits of home ownership this tax season.

Let’s examine how homeownership makes “cents” – from the tax benefits, to good old fashioned financial stability. The financial benefits of homeownership are evident year round, but particularly around tax time – they seem to jump off the page!

1. Homeownership Builds Wealth Over Time

We were always taught growing up that owning a home is a financially savvy move. Our parents knew it, and their parents knew it. But this past decade of real estate turbulence has shaken everyone’s confidence in homeownership. That is why it’s so important that we discuss this again now that we’re in a ‘new market.’ Homeownership can be a very savvy financial move – but only if people buy homes they can actually afford. In 2014, this idea of sticking to a home you can afford to gradually build wealth is a “rule” that just happens to be new and old at the same time.

2. You Build Equity Every Month

Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Every month you make a mortgage payment, and every month a portion of what you pay reduces the amount you owe. That reduction of your mortgage every month increases your equity. That is especially true now with the elimination of risky mortgages like negative amortized and interest-only loans – thanks to the new “Qualified Mortgage” rules. The way mortgages work is that the principal portion of your payment increases slightly every month year after year. It’s lowest on your first payment and highest on your last payment. Thus, as the months and years go by, your equity grows! This is great financial and tax season benefit.

3. You Reap Mortgage Tax Deduction Benefits

Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable.
Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.

4. Tax Deductions on Home Equity Lines

In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the horrendously exorbitant credit card interest rates, and get a deduction on the interest as well.

5. You Get a Capital Gains Exclusion

If you buy a home to live in as your primary residence for more than two years then you will qualify. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. Now, it may sound ridiculous that your house could be worth more than when you purchased it after these past several years of falling house prices. However, if you purchased your home anytime prior to 2003, chances are it has appreciated in value and this tax benefit will come in very handy.

6. A Mortgage Is Like a Forced Savings Plan

Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing.

7. Long Term, Buying Is Cheaper than Renting

In the first few years, it may be cheaper to rent. But over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying over the tax season. But more importantly, you are not throwing away all that money on rent. You gotta live someplace, so instead of paying off your landlord’s home or building, pay off your own!