property tax
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- Last Updated: Thursday, 31 March 2022 16:39
- Published: Friday, 27 December 2019 03:23
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Property taxes in USA:
In most of the countries when you buy or own a home for your living, there's no tax that you pay to the government for owning in a house. However, in USA, you have to pay a property tax to local authorities for owning a home. If you live in a rental house, then the owner of that house pays the property tax. One noteworthy point is that you have to pay property tax to the local authorities based on the market value of the house (that's true for most of the states. One notable exception is California, where taxes are charged on the purchase price of the house, and remain fixed as long as that property is not sold). Property taxes vary a lot from state to state, from city to city, and even within a city. On avg, it ranges from 1% to 3%.
Tax breaks for homeowners:
1. Homestead exemption: However one respite that homeowners get is that they get "Homestead exemption" which basically reduces the taxable amount of the property, thus reducing the taxes paid. However, this "Homestead exemption" is only available if you use that house as your primary residence for that calender year.
2. Federal tax benefit: Other tax break you get is from Uncle Sam. when you file your taxes with IRS. You can reduce your taxable income by deducting the amount of property taxes and interest paid on the house that you used as your primary residence. However, this deduction is only available if you itemize your deductions (i.e you don't claim standard deduction which is about $12K for year 2012). So, only if your mortgage interest and property taxes are over $12K, you see any benefit from it at all. It turns out that with interest rates of 2.5% and property tax of 2.5%, your house has to be over $250K, before you see even the first cent of any federal tax break. So, it's of no use for most of the people, who buy reasonably priced houses, within their means.
UPDATE 2019: Starting 2019, there are lot of changes in tax laws. Standard deduction is $24K, and amount of property tax that you can deduct is limited to $10K. Also, house prices have started going over $0.5M in most employable cities. However, the fact still remains, that most homeowners will still see very small tax benefit for owning a home, even more so with 2019 tax changes.
UPDATE 2022: Starting 2022, home prices are breaking all records, and now a whopping 10% of houses in USA are over $1M+. If you look at employable cities, and houses within reasonable commute distance, most of these houses are over $1M+. Most likely if you have a decent job (top 10% of income earners), your house has already breached $1M mark. In such cases, it may be worthwhile to look into itemizing tax deduction (as property tax of $10K+interest of $20K), will easily surpass std deduction of $24K.
Tax rates:
When you search for property tax rates for different states, you will find websites giving you a range of tax rates for different states. However, these rates are meaningless, as the rates vary a lot within the same state and same city. Before you purchase a house, find out the tax rates from neighbors, or ask them from where you can get the tax rates. More than likely, you can goto county website to get this info.
I'll talk specifically about Texas, as I'm in Texas. In Texas, for any given city, these are the taxes charged:
School district tax: A major portion of property tax goes into Public schools to fund them. So, as expected, School district tax are the biggest component of property tax. It's usually 1% or more of the value of your property. All schools that you see around you where 90% of the American kids go are public schools. Most of America attends public school, as the education is at par with private school, and you don't miss anything. There are few private schools in every city. However, private schools cost a lot of money, while public schools are free. Public schools are funded by tax dollars. Funding these public schools is the responsibility of state government, so each state government levies some kind of tax to fund these schools. Many states choose to use part of state income tax to fund these schools. States which don't have state income tax, instead use property tax to fund these schools. School district tax is part of that property tax that goes into funding schools (usually levied in states which don' have state income taxes)
Within a city, there can be several Independent School District (known as ISD). Each ISD is governed independently and can charge whatever tax it seems appropriate based on the funding it needs. Usually good ISD charge higher tax (since they maintain high quality of education through higher funding). Also, property prices are most directly influenced by rating of ISD. For top ISD, property prices are atleast 10%-20% higher than those with mediocre ISD. So, you get penalized twice with high rated ISD - one as higher property tax rate, and other as higher property price. The reason, why ISD are so important is because each house in USA is assigned a ISD. A kid with that particular home address can only attend the assigned school in that iSD. Though it's possible to send your kid to a different school, if you don't like that particular school, but it's not easy, and you have to justify it with concrete facts (not just because the school is low rated). Also, other important thing to note is that even though the particular ISD may be highly rated, but the particular school (elementary, middle and high school) that your kid will be going to, may still be pretty low rated. So, make sure that your particular schools are rated OK (rating of 8 or greater out of 10). If you are going to send your kid to private school, then ISD or public schools should not matter for you. ISD are usually named after the name of the city.
County tax: County is similar to a district of India, where a city and its suburbs belong to one county. County tax rate is the same for every house in that county. Usually county tax is small at about 0.25% of the property value.
City tax: Each city charges it's own tax. City tax are the 2nd biggest component of property taxes after the school district taxes. City taxes vary widely from 1 city to other, but usually they are in the range of 0.5% to 1%. Most of the times, if you live in a big city, and your home address has the name of that city, you will be charged the city tax for that city. Sometimes, even though your address may indicate a particular city, your home still may not be part of that city from tax perspective. It might still be considered part of some suburb of that city depending on how the zoning and addr assignment was done. So, your city tax rate might be the suburb city tax rate. For ex, I might live in dallas city (and have a dallas addr), but might still get city tax charged by suburb of dallas, i.e plano city tax instead of dallas city tax. Usually newer cities have higher city tax rate than older established cities.
NOTE: even though your city tax may be from city A, your ISD may belong to city B. In such case, you get 2 tax statements, one from your city and one from your ISD (which might be in another city). There's no guarantee that ISD that your house is assigned to will be in the same city as your house. The reason for this is that population growth may be uneven across different areas, which may make some ISD overwhelmed, while some other may have lots of vacant slots. So, ISD reassign home addr amongst themselves to make sure no one is running out of space. ISDs for homes may change too in future.
Other thing to note is that sometimes there may be no city tax at all even though your addr may indicate a city name. This happens when that area is in the suburbs of city, and city doesn't provide services to that part of town (i.e not providing water lines, sewage lines, fire services, etc). In such cases, city doesn't charge a city tax. I've seen this happen to a lot of areas around Austin city. This may change in the future though, as city tries to being more and more areas under it's tax jurisdiction (as it's free money for the city).
College tax: There are lot of community colleges in cities, which are funded partially by College tax. This college tax is levied by the county, and is the same for a given county, so sometimes these are lumped together with county tax. This tax may not be present for all counties or cities. This tax is usually small at 0.1% or less.
Hospital tax: Many counties have Hospital tax too. These are the same for a given county, so sometimes they are lumped together with county tax. Again, this tax may not be present for all counties or cities. This tax is usually small at 0.1% or less.
MUD tax: Sometimes, a neighborhood is not part of any city for tax purpose. Some of these neighborhood form MUD (Municipal Utility District) which provide water/waste water services (since city may not provide these services for whatever reasons). MUD basically raises bond money for setting up water/waste-water infrastructure, so that the neighborhood gets these municipal services. The MUD is setup as non-profit only for that neighborhood, and taxes properties at a very high rate (sometimes as high as 1%). This MUD tax is supposed to go down over time (as the bpond is paid off), but very rarely happens so. Remember that you still have to pay water and waster bills every month for water that you use, just like you would pay anywhere the city provides these facilities. To top it off, these water/waste-water bills are also lot higher. These MUD are very common in Texas, so be very careful before you purchase a property with MUD taxes (MUD taxes are a poison). Some newer properties do away with MUD completely by setting up private septic system for waste-water drainage, which is lot cheaper. They get water from some water utility, not sure how? FIXME
Other taxes: there might be myriad of misc taxes on top of all other taxes. However, these other taxes are usually small. Biggest taxes are school, city and county taxes, as explained above, accounting for 80% of the property taxes.
Sample Taxes for cities around State of Texas:
Below are taxes that I pulled from my tax statements for various cities. These will give you an idea of how much property tax to pay when you buy a house in Texas. Usually you will pay anywhere from 2% to 4% of the current value of the property as property tax. Since many houses in Texas are approaching $1M mark as of 2022, be prepared to pay $20K-$40K just in property taxes every year. They are based on current price, so if prices keep appreciating, you will keep on paying more and more.
1. Dallas, TX (in city): property tax rate breakdown (for year 2012):
School tax: 1.29% (for Dallas ISD)
City tax: 0.8% (For house in dallas city only, other cties in suburbs have different rates)
Dallas County tax: 0.25%
Hospital tax: 0.27%
College tax: 0.1% (for DCCC = dallas county community college)
So, total property tax for Dallas, TX is: 1.29 + 0.8 + 0.25 + 0.27 + 0.1 = 2.71%
However, as an homeowner you get "Homestead exemption". So, with homestead exemption, these are the rates (NOTE: I show lower rates with homestead exemption. In reality, rates remain the same, your taxable value goes down by 20%, resulting in lower effective rate):
School tax: 1.16% (for Dallas ISD there's 10% discount). Also, Dallas ISD lowers your taxable property value by $15K, on top of this 10% discount.
City tax: 0.64% (For dallas city, there's 20% discount)
Dallas County tax: 0.20% (For dallas county, there's 20% discount)
Hospital tax: 0.22% (20% discount)
College tax: 0.08% (20% discount)
So, total property tax for Dallas, TX with homestead exemption is: 1.16 + 0.64 + 0.2 + 0.22 + 0.08 = 2.3%. On top of this, you also get $15K knocked off from your property price for School tax, so that further lowers your tax rate a little (for a house of $250K, that implies reduction of 0.07%, so effective tax rate = 2.23%).
2. Austin, TX (in City): property tax rate breakdown (for year 2019):
School tax: 1.19% (for Austin ISD)
City tax: 0.44% (For house in Austin city only, other cties in suburbs have different rates)
Travis County tax: 0.35% (austin is in Travis county)
Travis Central Health tax (aka Hospital tax): 0.1%
Austin Community college tax (aka College tax): 0.1% (for ACC = Austin community college)
So, total property tax for Austin, TX is: 1.19 + 0.44 + 0.35 + 0.1 + 0.1 = 2.19%
However, as an homeowner you get "Homestead exemption". For travis county, homestead exemption lowers the taxable value of property resulting in effective lower rates. So, with homestead exemption, these are the rates:
School tax: 1.19% (for Austin ISD there's $25K exemption on property price, no reduction on tax rate).
City tax: 0.39% (For Austin city, there's 10% discount)
Travis County tax: 0.28% (For Travis county, there's 20% discount)
Hospital tax: 0.08% (20% discount)
College tax: 0.10% (For ACC, there's $5K exemption on property price, no reduction on tax rate)
So, total property tax for Austin, TX with homestead exemption is: 1.19 + 0.39 + 0.28 + 0.08 + 0.10 = 2.04%. On top of this, you also get $25K knocked off from your property price for School tax, so that further lowers your tax rate a little (for a house of $500K, that implies reduction of 0.06%, so effective tax rate = 1.98%).
3. Austin, TX (outside city): property tax rate breakdown (for year 2019): This is for a property having an address in Austin but not considered in city limits for tax purpose. So, there is no city tax, but MUD tax. This address is in Eanes ISD (NOT Austin ISD), so School tax is for Eanes ISD (Eanes ISd is top rated ISD in Austin)
School tax: 1.2% (for Eanes ISD)
City tax: 0% (For this house, there is no city tax even though address is in Austin)
Travis County tax: 0.35% (austin is in Travis county)
Travis Central Health tax (aka Hospital tax): 0.1%
Travis County ESD #10 tax: 0.1% (this is for addresses that are not considered part of City of Austin)
Austin Community college tax (aka College tax): 0% (No ACC tax as address is not considered part of Austin)
MUD tax: 0.6% (This MUD tax is just because that particular community developer formed a MUD. Some developers put their own septic system, and thus never have MUD taxes)
So, total property tax for this property in Austin, TX is: 1.20 + 0.35 + 0.1 + 0.1 + 0.6 = 2.35% (so absence of city tax was more or less compensated by MUD tax). You can find many houses in Eanes ISD, which do not have MUD taxes, so their property taxes are closer to 1.75%. Some MUD taxes also also lower, like 0.3% or so. Again, you get homestead exemption, which may lower your rates further.