Property Tax and Homestead Exemptions

Real estate property tax refers to taxes assessed against residential and commercial properties or raw land. The amount of taxation is based on each state's tax assessment policies. Funds obtained through property taxes provide revenue to pay for community needs within the counties of each state. Common expenditures include road and infrastructure repairs, improvement or building of new schools, and salaries of law enforcement agents and firefighters.

Property tax is calculated by multiplying the state tax rate against the assessed property value. For example, if the state tax rate is 7-percent and the appraised property value is $200,000, the annual property tax would be $14,000.

Many states allow property owners to submit property tax in two installments. Using the calculation above, homeowners would pay $7,000 per installment. Homeowners would need to set aside $1167 per month, in addition to their home mortgage payment.

The majority of mortgage providers include estimated property taxes in the mortgage note through an escrow account. The lender sets aside funds which are paid to the county tax collector when property tax installments are due. If mortgage lenders do not escrow sufficient funds, homeowners are responsible for the deficiency.

If lenders do not incorporate property tax within the home loan, borrowers are required to pay taxes directly to their state tax collector. If borrowers do not pay their assessed property tax in a timely fashion, mortgage lenders consider the loan to be in default and can commence with foreclosure action.

Most property tax bills are divided into three segments which include county, municipality, and school districts. Between 60- and 70-percent of property taxes are allocated toward education expenses, with the balance utilized for local and county government expenses.

Property tax rates remain the same unless changed through government legislation. Property assessments are subjective and can vary from year to year. Several factors are involved when determining appraised property values.

Tax appraisers can assess home values based on comparative sales of other properties in the area; the historical value of the real estate; or the potential value of the property if it is used to generate income through house flipping or as a rental home.

If homeowners feel they are being overcharged they can contest property tax assessments through their local tax collector's office. Tax assessors and government agencies do make mistakes, so homeowners should always check property valuation statements for accuracy. Review each tax statement for the property address, lot size, square footage, number of rooms, and appraised property value.

Contesting property tax assessments will require time and patience. Oftentimes, property owners must schedule an appointment to consult with a property tax representative. It is a good idea to retain previous tax bills in order to compare previous years' information. If mistakes are found, adjustments will be reflected on future tax bills as opposed to providing a refund check to the property owner.

Property owners might be entitled to property tax exemptions. The most common is the Homestead exemption which provides property tax exemptions against the property owner's primary residence.

Homestead property tax exemptions are generally a fixed amount. For example, Florida allows a $25,000 exemption, while California exempts the first $7000 of residential homestead from property taxes, and Louisiana exempts the first $75,000.

Homestead exemptions and property tax rates vary greatly by state. Mortgage lenders can advise estimated property taxes when establishing a new home loan or mortgage refinancing. When in doubt, it is best to consult with a qualified tax accountant or lawyer.