Real Estate Taxes vs. Property Taxes

Is real estate taxes the same as property taxes? Real estate and property taxes are terms often used interchangeably but have different meanings and implications for property owners. Understanding the difference between these two types of taxes is crucial for anyone who owns or plans to own real estate.

Real Estate Taxes

These are taxes levied on the value of real estate properties. Local governments impose real estate taxes based on the property's assessed valuation. They can include taxes on land, buildings, improvements, and other structures attached to the land.

Property Taxes

Property taxes are a broader term that includes all taxes levied on your property. Various government entities, including local, state, and federal governments, collect these taxes.

Your personal property consists of anything that is not permanently affixed to the ground and can be transported from one location to another. For instance, your vehicle is personal property, so you must register it annually. You pay a property tax on your vehicle as if it were real estate property.

Personal property includes boats, planes, campers, recreational vehicles, all-terrain vehicles (ATVs), farm equipment, and business equipment such as furniture and machinery. Because these items can relocate to a new location, their entire value is subject to a personal property tax. 

Comparison: Real Estate Taxes vs. Property Taxes

Similarities

• Both are levied on property, and the amount is based on the value of the property.

• The funds collected from these taxes support public services like education, infrastructure, and emergency services.

Differences

Property taxes are levied on all property types, including land, buildings, and other structures. On the other hand, real estate taxes are assessed only on real property, including land and the buildings or structures on it.

Real estate taxes are built upon the property's assessed value, which the local government determines. The assessment is usually conducted every few years and considers the property's location, size, and condition. Property taxes, however, are a percentage of the property's value, determined by an appraisal or market analysis.

States With Highest Property Taxes

Property taxes in New Jersey are among the highest in the country, with rates well above the 2% threshold. Another region of the country with high property taxes and pricey homes is New England.

Others include:

• Illinois at 2.27%

• New Hampshire at 2.20%

• Connecticut at 2.08%

• Wisconsin at 1.95%

Factors Contributing to Higher Property Tax Rates in These States

• High property values

• High government spending

• Limited state funding

• High demand for public services

• Reliance on property taxes to fund public services

States With Lowest Property Taxes

The states that have the lowest property taxes are as follows: 

• Alabama at 0.42%

• Louisiana at 0.51%

• Delaware at 0.55%

• West Virginia at 0.59%

Factors Contributing to Lower Property Tax Rates in These States

• Reliance on other revenue sources, like tourism or corporate income taxes

• Homestead exemptions provide property tax relief to homeowners

• Low property values

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How Are Real Estate Taxes Calculated?

The calculation process for real estate taxes varies by jurisdiction but generally involves multiplying the property's valuation by a tax rate. The resulting amount is the annual tax bill for the property owner.

The local government will request an appraisal of your property to determine your house's valuation. Evaluations take place annually in several different regions all over the world.

For example, if the current market value of your home is $300,000 and the local government assesses taxes at a 60% rate of the value, then you will be required to pay taxes on a $180,000 valuation. 

Factors Considered in Determining Real Estate Tax Amounts

• Property value: The higher the property's assessed value, the higher the real estate taxes.

• Tax rate: The tax rate can vary based on factors like the local budget, the level of services the government provides, and the tax base.

• Property Size: Larger properties have higher assessed values and, therefore, higher real estate taxes.

• Property Use: Commercial properties tend to have higher assessed values resulting in higher real estate taxes than residential properties.

Tax Exemptions

Make sure that any prospective exemptions for which you might qualify are considered. Residents of most cities and municipalities are exempt from paying property taxes if they fall under one of several predetermined categories. It's also possible that there will be no requirement to pay any property taxes in certain circumstances.

Millage Rates

Millage rates are the typical term for taxes levied against property. A tax assessed on a per-thousand-dollar basis is referred to as having a mill rate, as opposed to a tax calculated on a per-dollar basis. If the mill rate on your property is 0.001, you will be required to make an additional payment of $1 for each $1,000 that your home is worth.

Once you know the mill rate for your county, divide it by 1,000. Then, multiply the mill rate by your home's assessed value (not the appraised value) to determine how much you owe on your property taxes.

Bottom Line

Real estate taxes are taxes paid on land and any permanent fixtures, like buildings. Property taxes are a broader term that covers any tax assessed on personal property, including cars and boats.

Taxes can be complex when selling a property, but an experienced real estate agent can guide you through the process. A good agent will explain the tax implications of selling your property and help you navigate tax-related paperwork.

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