Real Estate Tax vs. Property Tax

If you have a house, you're undoubtedly accustomed to having to pay property taxes on a yearly basis. However, you may be unaware that property taxes are technically termed as "real estate taxes"—and that there is another sort of property tax that you may be required to pay as well.

Both forms of taxes are dependent on the worth of your residence. The primary distinctions are what constitutes real property vs personal property and how each category of asset is charged.

It's normal to be perplexed, but you shouldn't have to be. Continue reading to understand the key distinctions between real estate taxes and personal property taxes.

How Do Property Taxes Work?

Real estate taxes are yearly assessments on the appraised value of a residence that a homeowner must pay. Every city and state municipality sets the real estate tax rate by adjusting the fair market valuation of a residence by the municipality's preset percentage to come at the tax assessment value. Have you ever heard someone complain about the exorbitant expense of real estate taxes in their neighborhood? This is what they mean, and higher tax rates are common in major areas like New York and Los Angeles.

How are Real Estate Taxes Calculated?

If your home has a fair market value of $500,000 and your city or county's predefined proportion is 60 percent, the tax assessment worth of your property is $300,000 or 60 percent of $500,000.

If your local tax rate is 3%, you will pay $9,000 in real estate taxes each year. If your local tax rate was greater, say 8%, you'd spend $24,000 on a comparable house in another location. You can read more about: Is Real Estate a Good Investment?

Personal Property Taxes: What are They?

Personal property tax is an alternative term for property tax. Personal property refers to non-permanent or mobile assets in your possession. Your automobile, for example, is personal property, and when you register it each year, you're basically paying property tax on it.

Personal property includes things like boats, aircraft, campers, RVs, ATVs, agricultural equipment, and commercial equipment like furnishings or machines. Because they are all transportable, a personal property tax is levied on their worth, in the same manner as your home's tax value is levied.

It's worth noting that mobile homes are assessed as personal property, not real estate. People do live in them, just like they would in a home, but they are technically mobile. However, if you own the property on which your mobile home is located, it will be subject to real estate taxes based on its appraised land valuation.

The amount you pay in personal property tax on these things is also determined by your city and municipality, as well as the current personal property tax rate and the evaluated worth of each individual property.

Why are Real Estate and Personal Property Taxed Separately?

For starters, the rate of taxation that you pay varies. To summarize, real estate taxes are substantially higher than personal property taxes. When you think about it, you can often license an automobile with a value of $20,000 to $60,000 for a price of $40 to $75 every year. A residence is evaluated at a considerably greater value, and the tax rate is significantly higher. Even the lowest real estate taxes in the country would be several hundred dollars for a moderately priced home.

Also, if you reside in the home and list down deductions on Schedule A, you may be able to subtract real estate taxes as expenditures on your federal tax recompense. Personal property taxes may also be excluded if you itemize, but the exemptions will be much smaller on a boat or RV than they would be on your home and will appear in a different position on your federal return. This is due to the fact that personal property is often less valuable than a home, as well as the fact that it is taxed at a lesser rate than real estate taxes.

Conclusion

Real estate taxes and personal property taxes are two separate forms of taxes, despite their similarity in concept. Real estate tax is a fee levied by your municipality depending on the estimated worth of your property. Vehicles, business equipment, and furniture are all taxed at a distinct rate, which is the personal property rate.

One thing that may be taxed as private possessions instead of real estate could be perplexing. A mobile home is classified as a personal property if the owner does not own the land it sits on. The land is charged for real estate tax if the mobile homeowner owns it.

You're less likely to use the phrases simultaneously now that you understand the distinction between real estate taxes and personality property taxes, and you're more inclined to recognize the tax documents and invoices you obtain for each one.

Most Commonly Asked Questions

• What Is the Difference Between Property and Income Taxes?

  If you make money during the year, you must disclose it on your tax return. Money from wages, interest income, investments, and other sources are all included. Even if your home is recognized as an asset, it is taxed independently as real property and does not count as real income (until you sell it for a profit).

• Is it Possible to Reduce Property Taxes?

  Because real estate or property taxes are dependent on the valuation of your residence, you'll eventually wind up incurring more in taxes if the value of your home rises. There are, however, a few options for lowering your property taxes. For instance, educate yourself with nearby property prices so you can determine whether the assessor made an error. You may be able to file an appeal for a nominal charge if you feel your home's most recent assessment is too high.

• Which states are exempt from paying property taxes?

  All 50 states, as well as Washington, D.C. levy property taxes. However, in certain states, the effective tax rate is smaller than in others. Hawaii, Alabama, Louisiana, Delaware, and West Virginia are among the states with the lowest property taxes.