Property taxes in the United States are used to fund government services, including schools, roads, public parks, and infrastructure. Counties, school districts, utility providers, and other taxing authorities set tax rates based on local budgets and assess fees according to the value of residential and commercial properties in their jurisdiction.
Homeowners and real estate investors may believe personal property tax is the same as real estate tax. However, there is a distinction between them, and each is assessed and calculated differently. Understanding the tax structure in your area can help you estimate how much you will pay in property taxes. Learn more about calculating property tax and how to save.
Are Real Estate Taxes and Property Taxes the Same?
Real estate taxes are commonly called property taxes, but are real estate taxes the same as property taxes?
Although using the terms interchangeably is technically correct, misunderstandings often surround the type of property being taxed.
Real estate taxes, also known as real property taxes, are assessed on agricultural, commercial, industrial, and residential land. Real property tax is also applied to permanently attached fixtures on the land, such as homes, buildings, or utilities.
Personal property taxes are different than real estate taxes. They are assessed on property not permanently affixed to land, including vehicles and boats. Machinery, tools, electronics, and other equipment used to generate income as part of a business are also subject to personal property tax in many states.
Understanding Personal Property Tax
While every state has some form of real estate tax, only certain states and local governments collect personal property taxes. Tangible personal property, like farm equipment, retail display fixtures, office furniture, and inventory, is calculated in some states to figure a business's total tax liability.
Real Estate Taxes vs. Personal Property Taxes
Property / Real Estate Taxes | Personal Property Taxes | |
|---|---|---|
Definition | Residential or commercial property or land and permanently attached assets | Revenue-generating, tangible property not affixed to land |
Property Types | Property used for agricultural or industrial purposes, residential homes, rental property, and commercial buildings | Boats, vehicles, equipment, machinery, livestock, supplies, and business inventory |
Responsible Party | Property owner | Personal property owner or business owner leasing land for commercial purposes |
Taxing Authority | Counties, local government entities, and school districts | State and local governments |
Calculation | Based on property value and local effective tax rate; assessed by taxing authorities | Based on fair market value of the property as reported by property owner |
Tax Rate Type | Real property tax | Tangible property tax |
Purpose | Used to fund local government services such as schools, safety services, road maintenance, and utility infrastructure | Revenue source for state budgets |
Frequency | Annually | Annually |
Exemptions | Vary by state for qualifying property owners | Deductions on federal income tax |
How Real Estate and Property Taxes Are Calculated
Since local governments rely on taxes to fund services everyone uses, residential and commercial owners bear responsibility for property taxes in the United States. How you calculate your property taxes depends on where you live. Differences in how states and local governments assess property taxes result in wide variations in property tax payments from state to state and even between counties and cities within the same state.
Understanding how to calculate property taxes helps you better budget for expenses and avoid the need to take out property tax loans. You can also be confident that you're taking full advantage of all the available savings.
Real Estate
Real estate taxes are figured using a property's assessed value. For instance, if your state offers property tax exemptions, subtract any exemptions from the property's value. Exemptions reduce taxable property value, so you save money. Finally, multiply by the tax rate in your area.
Example: A property valued at $800,000 with $50,000 in exemptions and a 1.2% effective tax rate would pay $9,000 in real estate taxes annually.
$800,000-$50,000= $750,000 x 1.2% = $9,000 tax bill
Personal Property
Some states also levy taxes on tangible personal property to calculate the total personal property tax bill. Depending on the jurisdiction, personal property tax may only apply to items valued above a particular threshold or those used for business purposes. Some states and counties require the taxpayer to itemize all personal property in their possession.
The total of all taxable items is multiplied by the local tax rate, and the sum is added to the real estate tax to determine total taxes for the year.
Example: The above-mentioned property includes $300,000 of tangible personal property with a tax rate of 1.2%, which is $3,600 in personal property taxes.
$300,000 x 1.2% = $3,600 + $9,000 in real estate taxes = $12,600 total tax bill
Tax Assessment Process
County tax appraisers are responsible for determining the value of real estate within their jurisdictions. In some states, property value is based on the sale price. Most often, real estate assessments are calculated based on the estimated market value.
This process is repeated annually, with property values changing based on supply and demand, market conditions, and other factors. If you disagree with the assessed value of your property, you can file a property tax grievance or appeal to lower your assessed value and tax bill.
Personal property taxes are based on each item's fair market value as determined by an appraiser or recorded by the property owner. In counties and cities where the taxpayer makes the determination, they are provided with a valuation table to estimate the worth of personal property based on its age, condition, and depreciation.
If you make mortgage payments and your state doesn't assess personal property taxes, paying the property tax bill will be easy. Your real estate taxes will come out of your escrow account.
Property owners without a mortgage will pay taxes directly to the tax assessor's office in their area. Those required to pay tangible personal property tax must file a personal property tax return annually, along with their real estate taxes.
Factors Affecting Tax Rates
Local budgets determine tax rates. Rates fluctuate based on several factors, including economic growth, voter approval, inflation, and projected community needs. Sometimes, counties and local municipalities miscalculate their budgets during the previous fiscal year and are required to adjust tax rates the following year due to changes in the market.
Potential Deductions and Exemptions
Deductions and exemptions are two different strategies for lowering your tax liability. Both real estate taxes and personal property taxes are deductible. Deductions refer to dollar amounts you are permitted to subtract from your federal or state property taxes as credit for being a property owner. The federal government determines the amount and type of property you can deduct, not your state or county. When purchasing a property, refer to the settlement statement for the information you need to claim your deductions.
Individual states and local governments grant property tax exemptions to qualifying property owners. They also help reduce your tax liability and save you money by lowering the property value on which you owe taxes.
Save on Property Taxes With Ownwell
Avoid overpaying on property taxes. Our first-time homeowner's guide on property taxes helps residential buyers navigate how to save money.
Plus, Ownwell helps you file for exemptions in your state and retroactively up to two years later. And we have the most-advanced software and local property tax consultants to help you appeal incorrect property assessments.
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