What is property tax? Property tax is one of the many responsibilities — and expenses — that come with owning a home. Counties, municipalities and school districts are just a few of the taxing bodies that rely on property taxes to fund their operations. Whether you’re gearing up to be a first-time homeowner or you’ve purchased a home before, it’s critical you consider how much your property taxes will cost. The way taxes are handled varies by state and by local tax jurisdiction, and learning how yours are levied can help you determine your overall housing costs.
Here’s what you need to know about property taxes:
1. You Could Incur Penalties for Not Paying Property Taxes
You probably know that you should pay your property taxes, but you might not know what happens if you don’t. The penalties vary by city and state, but overall, you can eventually lose your house to foreclosure if you fail to pay your property tax bill.
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2. You Might Be Allowed To Pay Your Property Taxes With a Credit Card
Some cities will allow you to pay your local property tax with a credit card, usually through a third party that helps facilitate that process. But remember — just because you can doesn’t mean you should.
The payment processors typically charge a 2-3% fee on credit card payments they process. When you’re paying a large bill like a property tax bill, that can really add up especially if the fee outweighs any credit card rewards you might earn.
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3. You Get a Tax Break Because of Your Property Taxes
Buying a home is an expensive process, but owning one can get you tax deductions, tax credits and tax rebates on your next tax bill. You can deduct what you paid in property taxes throughout the year when you file your federal income tax return.
This tax break reduces the amount of tax you owe, and it can even help you qualify for a refund. Just don’t forget to pay taxes by the tax deadline.
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4. You Can Pay Your Property Taxes Out of Escrow
Many mortgage companies make paying property taxes more manageable by paying your property taxes out of an escrow account you fund by paying 1/12 of your tax bill with each monthly mortgage payment. Just be sure to follow up every now and then to check that your tax bills are being made on time because you are trusting your lender to pay these bills on your behalf.
5. You Might Be Eligible for a Property Tax Exemption
In some cases, you might be tax-exempt when it comes to your property taxes. Tax exemptions vary by state and by local tax jurisdictions, and to find out if you’re eligible, contact your local tax assessor for property tax information.
Military veterans often qualify for exemptions. And residents of Smithtown, New York, for example, can get an exemption for building or renovating a home for a grandparent or elderly parent.
Homestead exemptions reduce property taxes for all homeowners in a particular jurisdiction by sheltering a certain amount of a home’s value from tax. These exemptions are considered progressive approaches because they provide the greatest tax relief to the homeowners who need it most.
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6. You Can Get an Estimate of Your Property Taxes Before You Buy
The way property taxes are calculated vary city to city and state to state. To get an estimate of your property taxes, you could use a property tax calculator, but in order to get a more accurate answer, contact your local tax assessor’s office. They can give you the exact amount you might owe and can answer any questions you have. Getting an estimate proactively, before you purchase your home, can help you better understand if you can truly afford all the costs that come with owning a home. The last thing you want to do is underestimate your housing budget and get stuck with a bill you can’t afford, which could potentially lead to penalties and foreclosure.
How Does Property Tax Work and How Often Do You Pay Property Taxes?
Lenders often roll property tax payments in with a mortgage, so in these cases, your property taxes are paid monthly as part of your monthly mortgage payment and handled directly by your lender. If you do not have a mortgage, you will be responsible for paying your own property taxes. Property taxes are due annually, but some counties may allow you to pay in installments instead of one lump sum. If installments aren’t an option, you can deposit your monthly amount due to a high-yield savings account so it can earn interest until you pay your bill at the end of the year.
Ultimately, to be fully prepared for your home purchase, learn as much as you can about property taxes by state and in your county. Property taxes can be a significant expense for your household, so it’s important to know what percentage of your budget will go toward them.
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Cynthia Measom contributed to the reporting for this article.
Last updated: Mar. 29, 2021
This article originally appeared on GOBankingRates.com: 6 Things Every Homeowner Should Know About Property Taxes
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