Property Taxes

General real estate taxes are the taxes levied on real estate by various governmental agencies and municipalities (e.g., states, counties, cities, school districts, etc.) to fund the operations of the agency. They are "ad valorem" taxes, which means that they are based on the value of the property being taxed.

Real estate is valued for tax purposes by county or township assessors. The valuation process is called "assessment," and the property’s assessed value is generally based on the sales price of comparable properties. Property owners who feel that their assessment is too high relative to other properties may appeal to a local board of appeal. If an agreement can not be reached, the case could ultimately go to court.

Tax rates are determined by each taxing body separately. They project operating expenses for the coming year and divide the monies needed by the total assessments within their jurisdiction. A property owner’s tax bill is determined by multiplying their assessed value by the tax rate.

In most areas, homeowners receive one tax bill that incorporates all of the taxes levied by the various governmental agencies serving the property. In some cases, however, separate bills are prepared by each taxing body, and they may come at different times during the year.

Due dates for tax payments are set by statute. Taxes may be payable in two, four or twelve installments annually. In some areas, taxes are paid in advance (e.g., all of the taxes for 2001 are due in January 2001). In other areas, taxes are payable throughout the year (e.g., taxes for 2001 are paid in installments throughout 2001). In still other areas, a partial payment is due in the year of the tax with the balance due the following year (e.g., some of the taxes for 2001 are paid in 2001 and some in 2002). Your real estate agent can tell you more about the due dates for property taxes in your area.

If you fail to pay your taxes on time, you will be assessed a penalty. Each state has a statutory limit for delinquent taxes. After that limit, the government may collect the taxes by seizing your home and selling it at a tax sale.

Because your lender has a vested interest in making sure that such a sale never happens (since they would also lose a lot of money), they may want to escrow your taxes as part of your monthly mortgage payment. What this means is that they will increase your mortgage payment by the amount of taxes you will owe and set that money aside in a separate account. When the tax bill comes due, they will pay it. At the closing they may also want you to escrow some of the taxes that will be due at your next installment.

Finally, depending on how taxes are collected in your area, you may owe some of them to the seller at your closing. For example, suppose taxes in your area are paid in advance and due in November and May, and you are closing at the end of January. This means that the current homeowner paid taxes in November for four months when you will be living in the house (February to May). He may ask you to reimburse him at the closing for those taxes. That’s called "prorating," and I can help you figure out exactly what you will owe.

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F.C. Tucker on "Buying Your First Home"