Making property tax work to your advantage

On the abstract, property taxes have a laudable goal: you pay funds to the government based on the value of your property and those funds go toward beneficial public services, such as school systems, infrastructure maintenance, and critical emergency services. Ultimately, their role is to make your community a safer and more attractive place to live, work, and learn.

With that said, property taxes can come with unpredictable increases. As a result, they can sometimes pose a financial burden for the individuals and businesses responsible for paying them. Often, property taxes are a major deciding factor in whether to buy, sell, or remain in a home.

However, there are ways to reduce financial stress for property owners. In this guide, we’ll explore how to minimize the impact of your property taxes. Continue reading to learn about property tax credits, deductions, and other ways to make property taxes more manageable.

Home and property owners pay property taxes to their city, county, or municipality. These payments are due on an annual or semi-annual basis. The funds go toward improvements, repairs, and publicly funded local programs.

You can determine your property tax rate using a basic formula. Simply multiply your property’s value by the local property tax rate. You can learn the value of your property by working with a tax assessor.

Factors that may influence your property’s assessed value include:

• Your neighborhood or area
• Proximity to schools
• Local crime rates
• The size of your land
• The square footage of your home
• The age and condition of the property
• Additions or renovations to the home
• Outdoor improvements
• Amenities and features like pools
• The sale price of comparable properties
• Overall real estate market conditions

These factors have the potential to drive your home’s assessed value up or down and impact the property tax you owe. If property rates and values increase, your property taxes will, too. Since you can’t always plan for these changes, it can make budgeting difficult for some property owners.

While renters do not pay property taxes directly,, landlords are still responsible for paying taxes on the property. Thus, this will likely factor into a monthly rent payment. When property taxes increase, landlords may raise the rent to offset the higher expenses. That can put a burden on some renters, too.

Property taxes can vary widely even within a state itself. States like New Jersey and Illinois are known for having high property tax rates. In contrast, states like Hawaii and Alabama have some of the lowest. Additionally, states may impose additional property-related taxes on specific types of real estate, such as vacation properties.

With that said, your state may also be able to help relieve your property tax burden. Some states offer exemptions or property tax credits for specific groups, such as senior citizens or veterans. Looking into these programs is one way you can potentially reduce financial stress.

Short-term property gain tax is also known as capital gains tax on property. It applies to any profit made from selling a property that you have owned for one year or less. They are taxed at the same rate as your ordinary income, so they are subject to your income tax bracket.

You can determine the taxable amount with a basic calculation. Subtract the difference between the property's sale price and the original purchase price. Then add any improvements or expenses related to the sale.

That gain will be added to your annual income and taxed. This can significantly increase your overall tax liability.

Property taxes may be deductible if you choose to itemize your deductions on your federal tax return. You can do so using Schedule A on your tax return. However, this is only beneficial if your total itemized deductions exceed the standard deduction.

Additionally, only the portion of your property tax that funds government services is deductible. Other fees and charges are not.

Annually, you can deduct $10,000 of your combined property and other state and local taxes. It may be best to consult a tax professional. They can help you understand how the property tax deduction applies to your specific situation.

If property taxes have become a financial burden, there are several ways to minimize their impact. In addition to itemizing your deductions, here are some other ways to make property taxes work to your advantage:

• If you believe your home is overvalued, you could appeal your property value assessment with your local tax authority
• Apply for relevant property tax credits for senior citizens, veterans, or people with disabilities
• Invest in an area with lower property taxes and increase your potential ROI
• Deduct property taxes on any rental properties you own
• Seek out discounts for early property tax payments
• Set up a payment plan to spread out the cost of your property tax payments
• Proactively plan for property tax payments and incorporate them into your budget

Ultimately, living in an area with high property taxes can be a benefit. The payments go toward improving local infrastructure and amenities. As a result, you may slowly but surely increase your property value over time. High-quality public services and a well-funded school system are advantages when it’s time to sell your home.

Learn even more about managing your taxes by consulting our tax guides.

Sources

• https://www.irs.gov/forms-pubs/about-schedule-a-form-1040
• https://www.irs.gov/taxtopics/tc701
• https://www.gfoa.org/salt

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.