If you are new to the world of real estate, you might be a bit confused by all of the taxes that get assessed. To many people, the words ‘property taxes’ and ‘real estate taxes’ sound like they are the same, but there are some significant differences. Let’s take a look at them.
Real estate taxes are taxes based on the property’s assessed value. They are assessed on privately owned properties and funds are collected by local governments. Real estate taxes are the ones we often hear about that fund schools and pay for road repairs.
Property taxes have two sub-categories. There are certainly real property taxes that are real estate taxes, but there are also personal property taxes. Think of the real property as something that cannot be moved. These are things like the house, an external garage, a storage building, or a barn.
Personal property is defined as things that can be moved, like furniture. These taxes are sometimes called excise taxes. Your car is also personal property. Believe it or not, but that licensing fee you pay for your car is a type of personal property tax. If you have a business that repairs items or sells merchandise, that inventory is personal property. In many cases, you are exempt from taxes on the first $50,000 or $100,000 of inventory, depending on your state.
If you own an RV, this is counted as personal property because it can be moved, even though you might be living in one full-time. If it is sitting on land you own, you might have to pay real estate taxes on that land, but not in combination with the RV.
So what is the assessed value that these taxes are based on? Each local government has a department that looks at what the value of a property really is. They look at the structure and the land value itself. Sometimes they calculate these values separately and sometimes they are looked at together. The assessment rate is a lower percentage of the assessed value. For many areas, the assessment rate is 70% – 80%, which then reduces the value of the house, and therefore the amount that the tax rate is calculated against.
It should be noted that HOA or condo association fees are not the same as real estate or property taxes. Those fees go directly to the association to cover costs of common area repairs and maintenance.
Personal property taxes are assessed as a percentage of the value of the item. Each state and county will have its own regulations on how they calculate personal property taxes. Also, each state as well as the federal government allows for a tax deduction on personal income tax forms for real estate taxes that have been paid in a given year.
There are also exemptions that certain homeowners might qualify for that help reduce the tax burden. These exemptions are often for wounded military, the disabled, and the elderly.
Hopefully, this has helped clear up the differences between property taxes and real estate taxes. Though they sometimes do overlap, they are also quite different. It just depends on what the item is that is being taxed.