If you own a home, you’re probably used to paying property taxes every year. However, you might not realize that property taxes are officially known as “real estate taxes”—and there’s another type of property tax that you might also have to pay.
Both types of taxes are assessed based on the value of your property. The key differences are what counts as real property vs. personal property and how each type of property is taxed.
It’s understandable if you’re confused, but you don’t have to be. Read on to learn the important differences between real estate taxes and personal property taxes.
- Both real estate taxes and personal property taxes are “ad valorem” taxes, meaning they’re based on the assessed value of the item.
- Real estate taxes are levied on real estate property that’s permanently fixed to land.
- Personal property taxes are levied on movable assets, such as cars and boats.
- All 50 states and Washington, D.C., impose real estate taxes, but not all states have personal property taxes.
What Are Real Estate Taxes?
Real estate taxes are levied on “real property,” which the IRS defines as land and anything that’s built on or permanently fixed to it. That includes buildings such as houses, condos, industrial buildings, and garages, as well as the ground beneath them. That’s why most people casually refer to these taxes as “property taxes”—real estate taxes and property taxes are the same thing.
Counties or local municipalities charge property taxes on the real estate you own to raise funds for their operational budgets, said Thomas J. Williams, an accountant and co-founder of tax website Deducting the Right Way, in an email to The Balance. “It helps offset the cost of offering public services, safety, and schools.”
How Do Real Estate Taxes Work?
Property taxes are calculated by multiplying the real estate’s assessed value by the local tax rate. Williams said this is known as an “ad valorem” tax, which is Latin for “according to the value.”
Tax rates can vary by state, county, city, and even school district. Tax-Rates.org reported the median property tax rates by state in 2020, which ranged from 0.18% in Louisiana to 1.89% in New Jersey. For example, if you own a home in New Jersey that’s worth $250,000, you could expect to pay $4,725 per year in property taxes.
All real estate owners pay these taxes, and it’s important to pay them in full and on time. “Failing to pay a property tax bill can cause the municipality to issue a lien against the real property and engage in foreclosure actions,” Williams said.
Some property owners may qualify for exemptions on all or part of their real estate taxes. For example, many states offer property tax exemptions for veterans.
How Do You Pay Real Estate Taxes?
If you are financing your home, it’s common for the property taxes to be split up into installments and tacked onto your monthly mortgage payments. The funds are held in an escrow account until property taxes are due, and the lender will pay them on your behalf. Note that if the lender’s estimate is too low, you will end up underpaying property taxes based on the current escrow. In such a case, your escrow requirements would automatically be increased accordingly each month going forward.
To come up with the amount for your monthly payments, your lender will estimate your annual tax bill. If the lender’s estimate is too high and you end up overpaying, you’ll get a refund. This should happen automatically, or you can fill out a refund request form on your county or municipality’s Treasury website.
In other cases, you can pay your property taxes directly to your local tax office. You’ll receive a bill in the mail with payment instructions.
If you paid at least $600 in mortgage interest during the previous tax year, your lender will send you an IRS Form 1098 by Jan. 31. Box 10 shows you how much you paid in property taxes.
What Are Personal Property Taxes?
Though their name sounds similar to real estate or property taxes, personal property taxes work a bit differently. “This refers to the annual tax imposed on what the IRS terms ‘movable assets’—things like a boat, a mobile home, [an] RV, or a plane,” said Michael J. Franco, a licensed associate real estate broker at Compass, in an email to The Balance. The fee you pay to register your car every year is one example.
For businesses that are required to pay these taxes, personal property might also include equipment, appliances, furniture, and tools.
How Do Personal Property Taxes Work?
Personal property taxes are also calculated as a percentage of an item’s value, which typically decreases over time as its perceived value goes down, Franco said. These taxes are charged by county or local jurisdictions, which may choose to include different types of property in the tax assessment.
Williams noted that these taxes are usually self-reported on your tax return. Additionally, most municipalities will exempt a certain amount of property from being reported. For example, if your city exempts the first $50,000 in personal property and you own $70,000 worth, you’re only required to pay taxes on the remaining $20,000.
Again, be sure to pay your personal property taxes on time. “Failing to pay or report tangible property can lead to fines and liens against the property,” Williams said.
Mobile homes are usually considered real property when the wheels are removed, they’re permanently fixed to a foundation, and you own the land beneath them. In this case, a mobile home would be subject to real estate taxes rather than personal property taxes.
Real Estate Taxes vs. Personal Property Taxes
It can be tough to keep the differences between real estate and personal property taxes straight, especially since the terms “real estate taxes” and “property taxes” are used interchangeably. Plus, both real estate and personal property taxes are calculated according to the assessed value of the asset.
The easiest way to remember the difference between real estate taxes and personal property taxes: You pay real estate taxes on immovable assets and personal property taxes on moveable assets.
Of course, if you need help sorting out your tax situation, it’s always a good idea to talk to a local, experienced tax professional.
Frequently Asked Questions (FAQs)
How Are Property Taxes Different From Income Taxes?
If you earn income during the year, you are required to report it on your tax return. That includes money from paychecks, bank interest, investments, and more. Even though your house is considered an asset, it doesn’t count as actual income (unless you sell it for a profit) and is taxed separately as real property.
Can You Lower Property Taxes?
Since real estate or property taxes are based on your home’s value, you’ll end up paying more in taxes if your home’s worth increases. However, there are a few ways to lower your property taxes. For example, familiarize yourself with surrounding property values so you know whether the appraiser might have made a mistake. If you believe your home’s most recent appraisal is too high, you may be able to file an appeal for a small fee.
Which States Don’t Have Property Taxes?
All 50 states and Washington, D.C. charge property taxes. However, the effective tax rate is lower in some states than in others. States that have some of the lowest property taxes include Hawaii, Alabama, Louisiana, Delaware, and West Virginia.
The Bottom Line
If you own real property or land, you will have to pay real estate taxes every year. In many cases, you’ll also need to pay personal property taxes on moveable assets. It’s crucial to make sure you pay these taxes on time so you don’t risk losing your property.