Understanding Property Taxes

This long-standing form of taxation has its roots in ancient times. We take a look at the history of the property tax and go over the basics.

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Property taxes, in various forms, have been around since the dawn of civilization. There is evidence of their use in ancient Egypt, Persia and China. Primordial taxation focused on land, as its agricultural value played a major role, in its time. To this day, property taxes are a main source of revenue for local states and governments throughout the world.

We can trace our modern property tax system back to England in the Middle Ages. England’s kings lived in infamy as heavy-handed tax collectors. British landowners were obvious targets of tax collection, as they had the greatest ability to pay. Property tax in early America was the only major revenue source that supported state and local government programs. But, even back then property taxes were met with much opposition. The theme continues today, as the taxation of property has never been a popular one.

Property taxation is simply a levy assessed on property such as real estate. Real estate property taxes are typically assessed by county, state and local governments, rather than federal governments. Local authorities such as school districts, water and sewer services also play a role.

State and local governments rely heavily on the tax revenue derived from property taxes. In fact, property taxes are often the largest source of their income. In some states, property taxes produce more revenue than sales and income taxes combined. The national government plays little role in the collection of property taxes. Local and state governments collect property taxes on:

  • Land and structures
  • Improvements to land (property additions)
  • Personal man made objects (movable objects)

Whether the property is residential, commercial, or industrial, and also considering the property’s assessed value, are all contributing factors when determining property tax rates. Property taxes have been widely criticized due to the differences paid in various states. Based on property value, Alabama comes in at the lowest property tax rate state at 1.3 percent, while New Hampshire has the highest at 4.9 percent. But, before you pick up and move to Alabama or leave New Hampshire, it’s important to understand that there are variables involved. New Hampshire, for example, is able to exact more revenue from property taxes than other states, since they don’t levy general income, sales, or use taxes.

Real estate taxes are deductible on federal income tax returns. The more you pay in property taxes, the more you can write-off. In fact, there is no limit on the property tax deduction. If you’re a new homeowner you can also deduct property taxes paid by the seller, that may have applied to your property tax debt. As the new homeowner, you can make this deduction, regardless of whether you reimbursed the seller or not.

Many of the unfortunate individuals caught by the alternative minimum tax (AMT) aren’t so lucky, however. The AMT, with its noble roots, was originally created to make sure that the nation’s wealthy paid at least something in income tax. Thanks to inflation and an inflexible tax code, those previously defined as “wealthy” are now the middle class. As a result, millions of middle income American’s fall victim to the AMT each year. To make matters worse, property taxes are non deductible under the AMT. The good news is that recent AMT tax bill legislation should provide middle class homeowners with much needed relief.

One of the most famous property tax bills, California’s Proposition 13, has had more impact on property taxes, than any other levy in history. After much publicity, California voters overwhelmingly approved Prop 13 in 1978, making California property taxes affordable. Often referred to as the Tax Revolt, prop 13 had a major influence on other states voters, which led to many other states enacting their own property tax relief. The most significant factors as they relate to Proposition 13:

  • Limited property taxes to 1 percent of assessed value with March 1, 1975 as the base
  • Limited assessment value increases to 2 percent per year or the rate of inflation, whichever is less Property must be sold to reassess market value
  • Prohibited state lawmakers from increasing new taxes without a two-thirds vote of the legislature.
  • Prohibited local governments from adding new taxes without a two-thirds vote of the electorate.

Depending on your specific state and municipality, your property tax due date and procedures will vary. Paying a large annual or biannual property tax payment is not always easily manageable, even for the well-heeled. One way to ease the tax burden is to make your property tax payments along with your monthly mortgage payments. By doing so, your funds are kept in a mortgage escrow account until the property taxes are due. Escrow accounts are a convenient way to pay your property tax, homeowners insurance, and other bills. To be assured that your property taxes are paid on time, many lenders will require escrow mortgage accounts.

Since their introduction in ancient times property taxes have never been welcomed with open arms. To this day they still may not be celebrated, but they play a valuable role in our modern infrastructure. They fund the municipal budgets in which our federal government has little or no involvement. These funds support local infrastructures like our school systems, parks, libraries, hospitals, fire stations, and more. These are all critical areas of need, but equally deserving is property tax accountability on behalf of the taxpayer.