One of the least exciting parts of being a homeowner is paying taxes on the property you own. Groaning about that tax bill is practically a rite of passage after you buy a home! But if you’ve ever complained about paying property taxes on your house, you’ve made the common mistake of assuming property taxes and real estate taxes are one and the same. After all, your house is your property, right? But in reality, there’s a difference between the two. More specifically, real estate taxes apply to what the government calls real property, which is non-movable. And property taxes apply to movable property, such as vehicles and furniture. Here’s what else you should know about these two types of taxes.
Real estate taxes apply only to real property. This could be the house you live in, or it could be a rental property or vacation home. It could even be a separate garage, barn, or other structure on your property—as well as the land itself. Basically, if it would be destroyed if you tried to move it—meaning the walls and foundation would be damaged—it’s considered real property and you’ll have to pay real estate taxes on it.
So, how much will you pay in real estate taxes, and why? The amount you pay in taxes for your house mainly depends on the assessed value of the home, as well as the area you live in. City and state governments have their own tax rates. Once they decide on a percentage for the tax rate, they multiply it by the market value of the home. In general, you’ll pay more in real estate taxes in a big city than in a suburb or rural area.
The reason for real estate taxes is to have a way to pay for local services. For example, the revenue generated from this type of tax pays for public schools, roads, libraries, local government agencies, and emergency services for your area. Note that for most homeowners, real estate taxes are rolled into the mortgage payment, so your monthly payment to your mortgage lender should take care of the taxes. If your mortgage is paid off, you’ll have to pay taxes to your local tax assessor twice a year in most areas, depending on what your regular real estate tax notice says.
If you don’t yet own a house, you don’t have to pay real estate taxes. But if you own a car, boat, RV, camper, or ATV, you likely pay personal property taxes every year. Basically, any big piece of personal property that you can move is something you’ll be taxed on. This even includes mobile homes, small planes, farm equipment, and any machinery or furniture you use for business.
Maybe you don’t remember paying property taxes on any vehicles you own. But in most states, when you register your car, RV, etc. each year, a portion of that fee goes toward property taxes. And just as with real estate taxes, the amount you pay is determined by the assessed value of the property and the tax rate your city or state has decided to charge. So the amount of property taxes you pay on your car’s registration every year will typically be different than the amount you pay for your ATV or boat. And if you move to a different city or state, the amount of property taxes you pay will change, as well.
As you can see, there are some pretty big differences between real estate taxes and property taxes. First, you’ll pay each type of tax on different items, depending on if the government considers your belongings real property or personal property.
And since the assessed value and tax rate of a house is much higher than a car, you can expect to pay a lot more in real estate taxes than property taxes. Of course, it varies depending on the area, as some states don’t charge property taxes on vehicles. But on average, Americans spend about $2,500 on real estate taxes every year and about $440 on property taxes in the states that tax vehicles.
Another difference to consider is which taxes are deductible when you do your taxes. In general, a big benefit of buying a house is being able to take deductions on certain expenses, including real estate taxes. So even though you’ll likely pay a few thousand dollars per year on your home’s taxes, at tax time you’ll appreciate the ability to deduct them! You may also be able to deduct personal property taxes, but only if you itemize, and you’ll see less of an impact on your tax bill since these taxes aren’t as high as real estate taxes, to begin with.
Now you know that real estate taxes are not the same as property taxes, even though many new homeowners mix them up. Of course, it’s easy to see why, as the home buying process involves so many different terms you might not know. You may even need to refer to a glossary of real estate terms to keep up!
You can also ask your real estate agent for help defining terms you don’t know as you prepare to buy or refinance a house. If you don’t have an agent yet, or if yours doesn’t help you understand the home buying process, come to LemonBrew for guidance! We can put you in touch with top-tier real estate agents in your are that you can count on for support as you begin the process of becoming a homeowner. We can also help you navigate the journey of qualifying for a mortgage and getting home insurance. So contact us today to get started!