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Property Tax Basics

Property taxes represent a significant portion of your overall tax payments. Property tax revenues are used to support local vital community resources and services, such as public schools, police and fire protection services, roads, parks, streets, sewers, water treatment systems, garbage removal services, and public libraries. These are important amenities that depend on property taxation for their creation, maintenance, and improvement. In theory, there is a symbiotic relationship between property taxes and property values since these local amenities help improve your home's value.

Unlike income taxes, property taxes are due yearly irrespective of whether you have income. Property tax rates are dependent on several factors that may change over time. The taxable value of your home can be affected by factors such as the type of property you own, local property tax rules, sale price and fair market value of your home, and any tax exemptions (e.g. homeowner or homestead exemptions) that may apply in certain applicable situations. It's a good idea to get up to speed on property tax basics if you are a homeowner or planning to become one.

The following article provides a brief overview of property tax basics.

Property Taxes: At a Glance

A property tax is a tax levy on real property (such as real estate, residential properties, and commercial properties) and personal property (all property that is not considered real property, such as personal belongings, cars, equipment, etc.). Taxing land and buildings is one of the oldest forms of taxation in the United States and remains a significant source of revenue for local governments.

Municipal governments also use property taxes to collect revenue more so than any other taxing authority. Municipalities have the authority to permit a tax levy (such as the seizure of your property or the garnishment of your wages) to satisfy your total tax liability (the payment owed by you to the municipality).

Once collected, property taxes are then redistributed and are used to help finance the local government, public services, and other community projects that individual property owners would not be able to finance alone. Each household's property tax bill is not the same, meaning the tax is not uniform across homeowners. Instead, the property tax rate is computed using a variety of different factors. Accordingly, the tax burden of every person may be different depending on the nature of their taxable property, the special districts that the property may be located in, and the taxation parameters set by the local legislature.

Property Tax Assessment

A tax assessor will use a certain computation method to assess your property tax rate. There are three main methods of determining how your property tax obligation is assessed (and it's important to note that an appraisal and an assessment may result in different property value determinations): the cost approach, the sales comparison approach, and the income approach.

  • Cost Approach — The value of just the land itself is added to the value of any structures (homes, etc.) and amenities (pool, etc.), minus the depreciation of the home and amenities, to determine the appropriate tax rate.
  • Sales Comparison Approach — The market value of the home is compared to other comparable residential properties that have recently sold in the area. These are often called comparable properties or “real estate comps," and they will be used to find similarities and differences with your home and the taxable rate will be adjusted according to those similarities and/or differences.
  • Income Approach — For income properties (such as rental properties), the process of "capitalization" is used to assess your home's income potential. The capitalization rate is computed by dividing a property's net operating income by the current fair market value of the home.

"Ad Valorem" Taxes

Some taxes are based on a proportion of the value of the property being taxed. These are known as "ad valorem" taxes. Ad valorem taxes are instituted by state laws and require taxpayers to pay each tax year for their real or personal property.

To arrive at a correct amount of tax, an appraisal of the taxable subject matter's value needs to be done periodically. When the property owner's property valuation changes, so do their appraised or assessed value. Most property taxes are of this ad valorem variety. Ad valorem property taxes are based on ownership of the property, and property owners must pay these taxes whether or not they actually use the property or generate income from it.

An example of an ad valorem tax is the Title Ad Valorem Tax (TAVT) and Annual Ad Valorem Tax in the state of Georgia. The TAVT is a one-time tax imposed on titled vehicles and, as of 2022, requires a rate of 6.6% of the fair market value of the vehicle. The annual ad valorem tax, however, must be paid each tax year and is required before a person can receive or renew their tags. These taxes are assessed using the fair market value of the vehicle and the local tax district's rates. The income from ad valorem taxes in the state of Georgia is distributed to the state, county, local school district, and cities.

Property Tax Basics: Taxing Authorities and Collection

Generally, responsibility for the three phases of the property tax system -- levy, appraisal, and collection -- rests almost exclusively on the taxing authorities within local governments. Like any other branch of government, a taxing authority is a legal entity with elected or appointed officers who serve a distinct geographic area.

Both state and local government agencies are authorized to levy taxes, but the way they conduct assessments, collection, and compliance can differ widely. In some state jurisdictions, a single state agency has primary responsibility for obtaining all appraisals, making assessments, and collecting taxes. In most states, certain agencies assess some or all railroads and utility properties.

Keep in mind that there may be opportunities to challenge the way your property is valued in some instances, such as through local assessment appeals or review boards.

Get a Free Assessment of Your Property Tax Concerns

If you're planning to buy a house but want a better understanding of your property tax obligation, or have any other concerns regarding property taxes, it's often best to speak with a tax attorney. They can help spot issues before they become bigger problems and help you get some peace of mind.

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