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How Property Taxes Will Cost and Save You Money

They affect what you can afford — but they offer a tax benefit, too.

Image: ArturVerkhovetskiy/Depositphotos

Workable Wealth logoThis article was contributed by financial expert and blogger Mary Beth Storjohann, CFP, author, speaker, and founder of Workable Wealth. She provides financial coaching for individuals and couples in their 20s to 40s across the country, helping them make smart, educated choices with their money.

If you’re in the market for your first home, chances are you’ve considered how property taxes are going to impact the amount of home you can (or can’t) afford.

Property taxes are taxes that are assessed on real estate and are typically based upon the value of the property (land included) that you own. They’re assessed by the governing authority of the jurisdiction where the home is located and can vary greatly depending upon the state, county, and school district lines you live within.  They typically go towards the creation of roads, school or park maintenance, trash collection, and other similar needs.

Where to Find Local Rates

Property rates vary significantly across the country, so instead of using a generalized assumption, it’s best to do your research to narrow in on what to expect for your area. A simple Google search of the name of the county or city and state and the term “property tax rates” should provide you with the rate you can anticipate paying. 

How Property Taxes are Calculated

The amount of property taxes you’ll pay is determined by multiplying the current assessed value of the property by the property tax (mill) rate. For example, a home in San Diego County worth $800,000 will have a property tax rate of 1.17%. Therefore, the annual property taxes owed would be $800,000 x 1.17% = $9,360.

If you’re not up for calculating out and researching rates in your area, you can typically find a good estimate of what you’ll pay through home listings or by using an online home affordability calculator.

Considerations for Your Budget

Property taxes are important to keep in mind as a part of your home buying budget. Due to the huge range you can experience, be sure to factor this into your expenses early in your shopping. 

For example, while a home in San Diego, California may cost $800,000 with a 1.17% property tax rate, a similar home in McKinney, Texas, could cost $400,000 with a 2.66% property tax rate (and an annual property tax bill of $10,640). You’ll pay more in property taxes in McKinney than you’d pay for a home in San Diego at double the price.

However, it’s important to note that putting down 20% and making payments on a mortgage on a home valued at $400,000 versus one valued at $800,000 will look significantly different when it comes to your overall budget. So while some areas may have higher property taxes, if their homes are priced more moderately, you’re likely looking at saving more money on an overall basis.

Keep in mind that in general, property taxes tend to increase over time, so allow for some wiggle room in your budget when it comes to your housing budget; don’t tap yourself out by spending the max early on.

Federal Tax Deduction for Paying Property Tax

As a homeowner, you’re able to deduct your property tax payments (and mortgage interest, within limits) from your federal income tax as an itemized deduction, reducing the amount you owe and putting some money back in your pocket come tax season. This benefit can ease the financial burden and while paying a higher property tax rate isn’t ideal, if you must, it’ll get you a larger tax benefit once you file your return.

Property taxes may get a bad reputation, but the fact is they can  go towards supporting some substantial needs in your community and they also provide you with some tax savings as well. They’re going to be a factor no matter where and what type of home you purchase, so ensure you evaluate your budget and determine how they impact the amount of home you can afford. 

Note: Tax reform plans being discussed in Washington could affect various home ownership deductions. 

Mary Beth Storjohann of Workable Wealth

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