Real Estate Law

The Tax Man Cometh: The Basics of Property Taxes

First time home owners such as Brenda Mullen often experience sticker shock when the first property tax bills start filling the mailbox. It was not only the large amount taxes owed on her home, but also the large property tax bills for other pieces of property Brenda forgot counted as taxable assets.

“I was too involved with work projects and kid activities that I forgot about paying property taxes,” said Brenda. “I called a tax attorney and she helped me get back on track paying what I owed the city and county.”

Most local governments such as counties and municipalities levy some form of property tax to generate the primary source of operating revenue. Property taxes vary by levying a tax on real estate and/or personal property. Many municipalities allow exemptions for certain personal property items, but typically you can expect to pay property tax on an automobile and recreational property such as a motor boat. Counties and municipalities calculate property taxes by assessing the fair market value of property. Local officials determine property values, which property owners can dispute by filing a formal protest with the city or county assessor office.

Why Local Governments Prefer Property Taxes

Local governments prefer property taxes over sales and income taxes because the revenue collected always equals the tax levied by the governing body. With real estate property generating the most revenue, local governments have one significant income source for funding public work projects. In a market where property values increase, local governments receive a windfall that is used for infrastructure improvements. The revenue derived from taxed vehicles represents the second substantial source of local government funding, especially in households that own more than one car, truck, or SUV. State law mandates the legality of municipalities levying property taxes to generate revenue. In addition to infrastructure enhancements and public works projects, property taxes typically fund streets, public libraries, fire departments, police departments, sewer treatment systems, and garbage removal services.

Types of Property Taxes

Local governments typically use one or more of the four types of property taxes. Property taxes levied on land generate the most revenue for rural areas that include large parcels of land used for agricultural purposes. Commercial buildings represent the second type of property tax, which generates the most revenue for large cities. Suburban homeowners offer municipalities the largest portion of tax revenue not only because of high home values, but also because of the prevalence of multiple story homes. Manufactured big ticket items, such as a car or motor home represent the fourth type of property tax.

Ad Valorem Taxes

Ad Valorem property taxes are calculated on the proportion of the value of land, buildings, and expensive personal property. This type of tax occurs more frequently than a direct property tax in areas that experience fluctuations in home and land values. The main reason to use the Ad Valorem tax is to attract new residents and business to a municipality. Ad Valorem taxes place a much lower tax burden on home and business owners.

Disputing Property Assessments

The biggest source of conflict between property owners and local governments is not the percentage rate of property taxes, but instead, the value assessment performed by the city or county assessor office. Disputes include challenging fair market valuation and the source used to account for inflation. Inflation calculation disputes are common in low cost of living areas of the country where the assessors office uses the higher national inflation rate. The resolution process for property assessment disputes vary, from the use of arbitration to the filing of lawsuits.

Home and property owners such as Brenda Mullen need work with a licensed real estate attorney not only to account for all property, but also to have legal guidance during property assessment disputes.

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