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US Property Tax Basics – Here’s What You Need to Know

By: Elite Legacy Education, October 16, 2017

Property taxes can be a nightmare, especially depending on which state you live in. Even for those lower tax states, paying taxes is never enjoyable. When it comes to real estate investing, it’s even more important to be up-to-date with your local property taxes. You don’t want to be blindsided and have your profits wiped out by unexpected taxes.


What are property taxes?


Property taxes are like every other kind of tax. You’ve got to pay it to the government. Besides that, property taxes are incurred on your property and real estate. A specified rate is applied to determine how much you owe. It is the property owner that is responsible for this amount. In other words, you as the landlord would be responsible. Not any of your tenants.


Who has to pay property taxes in America?


Just about every owner of a US property has to pay their property taxes. Although, the specified rate does differ by state. You’ll notice that some states have much higher rates compared to others. Keep this in mind as it may affect your potential investment opportunities. We’ll discuss this in more detail shortly.


In 2016, Americans paid a total of almost $278 billion in property taxes, according to a report from ATTOM Data Solution, the largest U.S. property database.


USA Today suggests this means that, “each of the country’s 84 million single-family homeowners paid an average of $3,296 in property taxes, which amounts to an average 1.15% effective tax rate.


How to calculate your property tax


There are two main methods you can use to calculate your property taxes:


  • An online tax calculator
  • Or by manual calculation (see below)


How are property taxes calculated in the US?


Here are the steps to calculating your property taxes:


Step 1: Determine the value of your property (you can refer to our articles on real estate valuation methods such as the cost and comparison approach).


Step 2: Find your assessment rate and multiply it by your property value – the resulting value is your assessed property value. It represents the taxable portion of your property’s value. The assessed value is generally lower than the market value of the property. The rate itself can be anywhere from 100% and lower.


Step 3: Find your property tax rate and multiply it by the result from Step 2. As you’ll notice, this requires you to find your tax rate. We suggest contacting your local tax regulation for more details on this. You’ll want to make sure you have the right tax rate.


What causes higher property tax versus lower property tax?


Knowing this can help you reduce this cost aspect of your venture. According to Investopedia, the city, county and school district generally have an influence on the tax rate applied to your assessed property value.


As we mentioned before, it can also vary by state. According to USA Today in April 2017, the bottom three are Hawaii (0.32%), Alabama (0.48%) and Colorado (0.52%). While the top three are New Jersey (2.31%), Illinois (2.13%) and Texas (2.06%).

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