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Property Tax

Property tax is assessed on real estate based on each state's local tax assessment policies. Income derived from property taxes is used to provide revenue to pay for needs within the community. This can include paying firefighters and police officer salaries, improvements to road repairs and infrastructure, and improving or building new schools.

Property tax is calculated by multiplying the state's tax rate times the assessed value of the property. For example, if your homes' appraised value is $250,000 and state property tax is 7-perecent, annual property taxes would be $17,500.

Many first time home buyers fail to calculate the cost of property taxes and are often shocked when they receive their first property tax bill. Most states allow homeowners to pay real property taxes in two installments, with half being due in the spring and the balance due in the fall.

Using the calculation above, homeowners would pay $8,750 for each installment. In order to pay real estate property taxes, homeowners will need to set aside $1,458 per month in addition to their mortgage payment.

Some mortgage lenders include estimated property tax payments in the mortgage note. Also referred to as escrow, these funds are set aside and paid to the county tax collector through the bank. If lenders do not collect sufficient funds, homeowners receive a tax bill for the balance.

In states where lenders do not include property taxes in home mortgage loans, borrowers must pay taxes directly. If borrowers do not pay their assessed property tax, banks consider the loan to be in default and can initiate foreclosure action.

Property tax bills are generally divided into three segments including county, municipality and school districts. Approximately 60- to 70-percent of property taxes are used for education, while the balance is used for local and county government expenses.

Although property tax rates are set, property assessments are subjective and based on several factors. Tax appraisers can value homes based on the sale price of other properties in the area; potential value if the property is used to generate income such as through rental or house flipping; or the historical value of the property.

Homeowners can contest property tax assessments through their local tax collector's office if they believe they are being overcharged. Government agencies make mistakes, so always check property valuation statements for accuracy. Review each statement for the property address, square footage, lot size, number of room, and appraised property value.

Contesting real estate property taxes requires time and patience. In most instances, homeowners will need to schedule an appointment to speak to a tax collector representative and present their case. If mistakes are discovered, adjustments will be made and reflected on future tax bills.

Some homeowners are entitled to property tax exemptions. Within the U.S., the most common exemption is known as 'Homestead' and provides an exemption from property taxes for homeowner's primary residence.

Homestead property tax exemptions are usually based on a fixed amount. For example, California exempts the first $7,000 of residential homestead from property taxes, while Florida allows a $25,000 exemption from the property value, and Louisiana exempts the first $75,000.

As you can see, property taxation and homestead exemptions vary greatly by state. Mortgage lenders can advise estimated property taxes when establishing a home loan or refinance mortgages.

We invite you to learn more about home mortgage loans, property taxes and insurance, buying and selling houses, and much more in our real estate article library. New articles are added each week, so take a moment to subscribe to our mailing list by entering your email address in the subscription box on the right side bar.