Being a property owner can quickly get very confusing and exhausting. While living on your own land comes with many advantages and freedom, it also brings new responsibilities. Life as a property owner doesn’t mean that you will forever be free of payments as you free yourself from monthly rents or mortgages. Property taxes are one of the most dreaded subjects in the world of property ownership. But don’t worry, it’s not as complicated as you think!

Here at Community Lands, we want to make the entirety of your land ownership experience easier. We have not only made the process of buying land easier and cheaper, but we also wish to guide you through this journey. With this quick, simple post you can learn everything you need to know about property taxes in just one read! Let’s get to it, starting from the basics to how you can get exemptions and possible credits.

What Are Property Taxes

Ever wonder how roads are fixed, public transportation is maintained, teachers in public schools are paid, and how so many other resources in your neighborhood are taken care of? All of that is largely funded by property taxes. Local governments collect property taxes from residents in order to upkeep resources they will be taking advantage of in their daily lives. Property taxes provide your local government with a guaranteed income to fund indispensable services, such as schools, road access, fire protection, and many others.

There are two main types of property taxes, real and personal. Personal property is used to describe cars, boats, and even stocks and bonds. However, most states tax primarily real properties. Real properties are land and buildings. This means that the plot of land and the house you live in are taxable real properties. But it also means that, if you own the property you operate your business out of, that land and building are also taxable real properties.

In simplest terms, property taxes are the value of the property, including land and buildings, multiplied by the tax rate of the region it is located in. Using this formula, local governments can guarantee that houses of vastly differing incomes are not paying the same property taxes. This means that families with a larger income can be taxed more than those less fortunate. With different property tax rates, residents pay only what is affordable for them.

Most often when you buy property, it already has an accessed property tax rate. In the case of buying vacant land, you are only required to pay taxes on the value of the plot of land itself. If you choose to build a house or other building in the property, property taxes for your land will increase. Now that your land is no longer vacant, the value of the building that is now on it will be added to the value of the land and factored into your property tax rate.

Here at Community Lands, we sell vacant land only. Our buyers are responsible for the property taxes of the property they buy right after signing the Purchase Sale Agreement. That includes properties that are being financed. But don’t worry! We deliver every property we sell free and clear, with no back taxes you have to worry about.

How Are Property Taxes Calculated

There’s a very basic, easy to understand and remember equation used to calculate property taxes. Like we explained above, property taxes are calculated by multiplying the property’s value by its location’s tax rate. But it takes a few steps to get to those numbers. First, you must get the assessed value of your property. The assessed value is found by first determining the property’s market value. Market value is the amount the property could be sold by, depending on other properties surrounding it. 

Assessments are done by a local assessor who independently estimates the value of real property. Assessors use prices of similar properties in the same area to get to the property’s final assessed value. This value is then multiplied by the assessment ratio. The assessment ratio is the percentage (from zero to 100) that the state will be taking into account to value your property. 

For example, State A has an assessment ratio of 100%, meaning that the assessed value of your property will be 100% of the market value. However, State B has an assessment ratio of 30%. A property worth $100,000 in State A has an assessed value of $100,000, but a property of the same price in State B has an assessed value of $30,000. This doesn’t mean that the property in State A is worth more, both are worth the same, but the property in State B will be taxed on only 30% of its value.

Now that you have your assessed value, you must calculate your millage rate. The millage rate comes from millesimum or thousandth. This means that every one mill is equal to 1/1000th. It’s important to understand mills because property tax rates are expressed in mills. Let’s look at that $100,000 property in State A again. The millage rate on it is 20 mills, meaning that the property taxes on that property are $2,000. Properties can be subject to a few local tax rates, such as a county tax, a school district tax, a municipal tax. The millage rate is calculated by adding all of those together.

Now that you have your assessed taxable value and the millage rate, we go back to the basic equation of multiplying value by rate. Let’s break it down into steps:

1. The property has a market value of $100,000
2. State A has an assessment ratio of 100%
3. The taxable value of the property is $100,000
4. The property’s millage rate is 20 mills
5. The property taxes are $2,000

Exemptions And Credits

There are two extra steps that can be added when calculating property taxes. In this case, these added steps could lower your taxable value. First, some exemptions can be subtracted from the assessed value. The assessed value minus any exemptions will be the total taxable value of the property. There are various forms of exemptions. Some of the most popular types are senior citizen exemptions, veterans exemptions, and exemptions for persons with disabilities and agricultural properties. Homeowners can also claim a homestead exemption to their primary residence. Homestead tax exemptions are designed to provide homeowners with shelter and financial protection. While it does not stop a bank from foreclosing on a home, it can protect surviving spouses.

The exemption can come as a fixed value or percentage. If the state allows for a $1,000 veterans exemption in State A, the taxable value of the $100,000 property is now $99,000. With the new taxable value being multiplied by 20 mills, property taxes are now $1,980 instead of the initial $2,000. While we used the veterans exemption as an example, all exemptions are calculated in the same way.

Property taxes can also be reduced through tax credits, also known as deductions. Tax credits can either reduce payable property taxes or provide reimbursements with tax returns. Like with assessment ratios, states have their own regulations and rates for property taxes deductions. You can be granted a  property tax credit if your property taxes exceed a fixed percentage of your income. You may also be eligible for a tax credit if your income is below a margin set by your state.

State A has a $300 property tax credit for those with a $70,000 or less income. Now that you’ve brought your taxable value down to $99,000 with a veterans exemption and calculated your property tax to $1,980, you can claim an extra $300 credit, bringing your total property taxes down to $1,680.

Let’s revisit the steps and equations presented above so that we can include exemptions and credits:

1. 1. The property has a market value of $100,000
   2. State A has an assessment ratio of 100%
   3. Veterans exemption allows for a $1,000 reduction
   4. The taxable value of the property is $99,000
   5. The property’s millage rate is 20 mills
   6. The property taxes are $2,000
   7. A tax credit of $300 is available for households with an income of $70,000 or less
   8. The total property taxes owed are $1,680