Real Estate Tax

Definition

Real estate tax, also known as property tax, is a tax levied by the governing authority of the jurisdiction in which the property is located. This tax is typically calculated based on the assessed value of the property, which includes both the land and the structures (such as homes or buildings) on it. Real estate taxes are generally used to fund local public services, such as schools, road repairs, and police and fire departments.

Examples

Residential Property Tax: Homeowners in a suburban area are required to pay property taxes calculated based on the assessed value of their home and land by the local taxing authority.
Commercial Property Tax: A business owns an office building in a city. The company must pay annual property taxes based on the value of the structure and the land it occupies.
Agricultural Land Tax: A farmer pays property tax based on the valuation of the agricultural land used for farming purposes.

Frequently Asked Questions

What determines the amount of real estate tax I owe?

The amount of real estate tax owed is often determined by two factors: the assessed value of the property and the tax rate set by the local government or taxing authority. The assessed value is typically calculated periodically by a local assessor.

Can real estate taxes increase?

Yes, real estate taxes can increase. They often rise when property assessments increase due to appreciation in property value, or when the local government increases tax rates to meet budgetary needs.

Are there any exemptions or credits available?

Yes, there are often exemptions or credits available for certain situations, such as homestead exemptions for primary residences, senior citizen discounts, veterans’ exemptions, and incentives for improvements or energy efficiencies.

How is the assessed value of a property determined?

The assessed value is usually determined by a local government assessor, who reviews property details including size, condition, location, and comparable sales data. This assessment typically occurs annually or biannually.

What happens if I don’t pay my real estate tax?

Failure to pay real estate taxes can lead to severe consequences, including penalties, interest charges, and even a tax lien on the property. Eventually, the local government may sell the property to recover the unpaid taxes.

Ad Valorem Tax: A tax based on the assessed value of an item, such as real estate or personal property.
Property Assessment: The process of determining the value of property, typically for purposes of taxation.
Tax Lien: A legal claim by a government entity against property when the owner fails to pay the tax due.
Mill Rate: A figure representing the amount per $1,000 of assessed value that is used to calculate property tax.

Online Resources

References

Brueggeman, W. B., & Fisher, J. D. (2021). Real Estate Finance and Investments. McGraw-Hill Education.
Geltner, D. M., Miller, N. G., Clayton, J., & Eichholtz, P. (2020). Commercial Real Estate Analysis and Investments. South-Western Educational Pub.
Fisher, E. (2019). Property Taxation in the United States. Urban Institute Press.

Suggested Books for Further Studies

Property Taxation in the United States by Fisher, E.
Real Estate Finance and Investments by Brueggeman & Fisher
Commercial Real Estate Analysis and Investments by Geltner et. al.

Real Estate Basics: Real Estate Tax Fundamentals Quiz

### What is a real estate tax based on? - [ ] The number of occupants in a house - [x] The assessed value of the property - [ ] The age of the homeowner - [ ] The square footage of the property > **Explanation:** Real estate tax is calculated based on the assessed value of the property, which includes the market value of both the land and any structures on it. ### What is one primary use of real estate tax revenue? - [x] Funding local public services - [ ] Paying national debts - [ ] Supporting federal military expenses - [ ] Financing international trade > **Explanation:** Real estate tax revenue primarily funds local public services, including schools, emergency services, and public infrastructure. ### Who typically assesses the value of a property for tax purposes? - [ ] The property owner - [ ] Federal government - [x] Local government assessor - [ ] Real estate agents > **Explanation:** The property value for tax purposes is usually assessed by a local government assessor. Assessments are based on various factors, including market conditions and property characteristics. ### Which type of property commonly qualifies for a homestead exemption? - [ ] Commercial properties - [x] Primary residences - [ ] Agricultural land - [ ] Rental properties > **Explanation:** Homestead exemptions commonly apply to primary residences, reducing property tax liability for homeowners who live in their home as their primary residence. ### What legal action can a government take if you fail to pay your real estate tax? - [ ] Increase utilities rates - [ ] Freeze your bank accounts - [x] Place a tax lien on your property - [ ] Cancel your business license > **Explanation:** If real estate taxes are not paid, the government can place a tax lien on the property. This lien gives the government a claim on the property value to recover the unpaid taxes. ### What is an ad valorem tax? - [x] A tax based on the assessed value of property or items - [ ] A flat-rate tax on income - [ ] A tax that varies with the time of year - [ ] A tax based on the taxpayer's age > **Explanation:** An ad valorem tax is based on the assessed value of property or items. Property tax is a common example of an ad valorem tax. ### What entity primarily sets the tax rate for real estate taxes? - [ ] The IRS - [ ] State governments - [x] Local government or taxing authority - [ ] The property owner > **Explanation:** The tax rate for real estate taxes is primarily set by the local government or taxing authority. The rate can vary based on local budgetary needs and policies. ### Can real estate tax rates change, and if so, how often? - [x] Yes, and they can change annually or based on local government decisions - [ ] No, they remain fixed forever - [ ] Yes, but only every decade - [ ] Yes, but changes must be approved by a national referendum > **Explanation:** Real estate tax rates can change, typically on an annual basis, depending on the decisions of local government or taxing authorities. Rates may be adjusted to meet changing budgetary requirements. ### Which of the following properties is NOT typically subject to real estate tax? - [ ] Commercial properties - [x] Federal government buildings - [ ] Residential properties - [ ] Agricultural lands > **Explanation:** Federal government buildings are typically exempt from real estate taxes. Residential, commercial, and agricultural properties usually are subject to these taxes. ### Which term describes the concept where a legal claim is placed on a property for unpaid taxes? - [ ] Mortgage claim - [ ] Preemption - [x] Tax lien - [ ] Leasehold claim > **Explanation:** A tax lien is a legal claim placed on a property for unpaid taxes. This claim can lead to the sale of the property to recover the unpaid tax amounts.