Owning a home can come with many benefits, but it also means you are liable for property taxes. Although property taxes may be inevitable, there are strategies you can use to potentially reduce them. But before we get into these strategies, let’s first consider some property tax basics.
How Property Taxes Work
Property taxes are taxes assessed on real estate and other personal property by local government authorities, including counties and municipal governments, as well as school districts and certain utilities. Since property taxes are assessed at the local level, tax rates vary from one jurisdiction to another.
The governing authority determines how much your property is worth or the dollar value given to your property strictly for tax purposes. This would be different than the fair market value of the home (how much your house would sell for). Instead, the tax authority will assign the assessed value based on a predetermined metric, such as a percentage of the most recent market sale or comparable sales.
The tax authority also determines the percentage rate that will be used as a multiplier against the assessed value to determine the actual amount of the tax. Commonly referred to as a millage rate, it can be adjusted by the tax authority as frequently as every year.
Finally, property taxes also may have certain exemptions. One of the most common is the homestead exemption, which provides you with a certain reduction in your property tax bill on your primary residence (but not on investment properties). There might also be a senior citizen exemption that provides an additional reduction once you reach a certain age (generally 65 or older). These exemptions vary by county and state.
Deducting Your Property Taxes
The bright side of paying your property taxes is your property taxes are potentially deductible on your tax return. For federal income tax purposes, you can deduct property taxes paid on your primary residence, and on a second home.
To deduct your property taxes, you must be able to itemize your deductions, own the property, and have paid the taxes for the year you are claiming the deduction (not when they are due). You can itemize if the total of all allowable deductions exceeds the IRS standard deduction for your tax filing status.
If you paid property taxes through your lender, the lender will report the amount of property tax paid on Form 1098. If you are paying your property tax bill directly to the local tax authority, then you will receive an annual tax bill. Copies of canceled checks for payment of that bill can be used to support your deduction.
How to Lower Your Property Taxes
If you believe your property’s assessed value is too high, you can file an appeal, which is a formal application to have your tax bill reduced. Below you can find a few tips to reference while going through the appeal process, and remember that you are appealing the assessed valuation of property and not the tax bill.
Contact the tax authority and determine the process. Every community has a set process for how appeals are handled. Find out what that is, and follow all of the steps exactly. Typically, your county assessor’s office will have this information on their website.
Find the value your property is assessed for. Once again, this is the value that the tax authorities assign to your property and what you will be challenging. What you will be looking for here is an obvious distortion, for example, a value of $500,000 assigned to your home which has a market value of just $300,000.
Determine recent sales of similar homes in your area. This is where you determine the general value of your property. You can do this by checking online source, such as Zillow.com. But just keep in mind that this is just an approximate value, and not evidence that you can use in your tax appeal.
Get a property appraisal. This is a standard valuation procedure performed by a licensed appraiser. It is commonly used by banks and other lenders to determine property value. The appraisal will provide a listing of the size and features of your home, as well as providing comparable homes to support the actual market value.
Once you have all of your information, make your appeal.
Although there’s no guarantee that the board will approve your appeal and reduce your tax bill, if you are certain that there is a wide discrepancy based on the market value of your property according to the tax office, it may be worth the extra effort.
