The Beginner’s Guide to Real Estate Taxation

Rose Morrison

Aug 17, 2020


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If you recently purchased your first home, your mortgage company may have discussed putting your property taxes in escrow to pay them timely. If you’ve paid off your mortgage, you still receive this bill each year, and failure to pay can have severe consequences. 

How does real estate taxation work, and how does it benefit society? More critically, what do you need to know about it? Read on to discover a handy guide to property taxes so you can stay on top of your obligations. 

What is Real Estate Taxation?

Bankrate defines property taxes as any form of tax levied on real estate or certain types of personal property. By strict definition, real estate taxes only apply to real property, which is permanently affixed to the land. The difference matters because, in some cases, RVs and mobile homes are subject to this duty, while in other jurisdictions, lawmakers define such items as vehicles. 

Do Real Estate Taxes Vary From Region to Region?

Property taxes vary from place to place. While no states completely exempt real property from any taxes, there are several with low rates. 

Hawaii wins the prize for the state with the lowest property taxes in the nation. Other notable low-rate locations include the following:

  • Alabama
  • Louisiana
  • Colorado 
  • Delaware
  • South Carolina
  • West Virginia 
  • Wyoming
  • Arkansas
  • Utah 
  • Nevada

Why do you need to know which states have the lowest tax rates? Let’s say you have deep pockets, and you decide to throw some of your money into real estate investment. You seek rental properties — where will you get the greatest bang for your buck? You aren’t worried about matters like school and area resource quality — you want to save money. 

If you love “Happy Gilmore” — it’s a must-see Adam Sandler flick — you’ll remember that Grandma nearly lost her home due to unpaid taxes. However, some states recognize that seniors live on a fixed income and can’t absorb increases the way working folks can. Thirteen states eliminate property taxes for those over 65, so if you are close to retirement age, consider downsizing to one of those regions. 

What Do Property Taxes Support? 

Property taxes are a tremendous funding source for public necessities. They help state and local governments fund education, transportation, parks, recreation, and libraries. You’ll often hear these rates mentioned when teachers go on strike. That’s because your property taxes go in part to provide needed revenue to area schools. 

If you are a family with young children, you don’t necessarily want to move into an area with low tax rates if you use public schools. Otherwise, the quality of your child’s education could suffer. A correlation exists between states with inadequate funding and overall academic rankings. 

However, critics argue that real estate taxation increases socioeconomic disparities. Schools in areas with higher property values enjoy increased funding. Given the way the pandemic has stretched limited resources, you can see how the lack of money for things like student laptops makes getting a quality academic experience challenging, if not impossible, for the most vulnerable. 

How Are Real Estate Taxes Accessed? 

Your real estate tax obligation stems from the assessed value of your property. Every one to five years, the tax assessor will estimate the worth of your land and any buildings affixed to it. They will use one of three methods in performing the valuation:

  • Sales evaluation: In this method, the assessor looks at similar property sales in the area. 
  • Cost: This method estimates how much it would cost to replace your property. 
  • Income: Finally, this estimation deals with how much you could earn by renting your home.  

Can you contest this assessment? You can, but it will entail a potentially stressful legal battle. However, the information the assessor uses becomes a matter of public record that you can access for a nominal fee should you choose to proceed. 

When Are Real Estate Taxes Due? 

Your jurisdiction determines when your property tax comes due. Some charge semiannually, while others bill you once per year, generally for the past 12 months. 

What Alternatives Do You Have for Making Payments? 

If you find you can’t pay your property tax bill, don’t stick your head in the sand, please. Each state implements procedures through which you can apply for an abatement, a deferral or a repayment plan. They offer limited protection from factors such as age, disability, income, and personal status. 

However, time is of the essence. The longer you delay, the more penalties and interest add up. Plus, the taxing authorities will look at you more favorably if you try to fulfill your obligation but cannot versus if you take the ostrich approach. It costs them time and money to hunt down delinquent taxpayers, and it makes them grumpy when they must pull out the stops.

What Happens If You Don’t Pay Real Estate Taxes?

Your real estate taxes run with your home, so the authorities will find you — or, at least, your property. When they do, they will issue a lien for the debt. This credit score blemish can keep you from buying another home or even getting a credit card. 

If you still refuse to meet your obligations, the authorities will sell your home to recover the balance. If you carry a mortgage, they may sue your lender, who may foreclose to recoup their losses. Either way, you find yourself on the street with an unsightly blemish on your record that can take years to erase. 

Understand Real Estate Taxation with This Guide 

As a homeowner or prospective investor, you must understand real estate taxation. By following this guide, you can fulfill your requirements and know what to do if you cannot. 

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