Property tax is assessed against residential and commercial real estate according to each state’s tax assessment policies. Property taxes are used to pay for needs within county communities such as law enforcement and firefighter salaries, improvements to existing schools, building of new schools, and road and infrastructure repairs.

Property tax is calculated by multiplying the assessed property value times the state tax rate. For example, if the state tax rate is 5-percent and appraised property value is $100,000, the annual tax rate would be $5,000.

Property taxes are paid on an annual basis, but most states allow homeowners to pay in two installments. Using the calculation above, property owners would pay $2500 per installment. Homeowners would need to set aside $416.66 per month to cover their tax bill. This amount is in addition to their monthly home loan payment.

Mortgage lenders often include estimated taxes in the mortgage loan and funds are placed in an escrow account. Lenders hold escrowed funds until tax installments are due and submit payments to the county tax collector on behalf of homeowners. If banks do not withhold sufficient funds, homeowners are responsible for any deficiency amount.

If mortgage providers do not include property taxes in the home loan borrowers must pay taxes directly to their tax collection office. When homeowners fail to pay assessed property tax, mortgage providers may consider the loan to be in default and can initiate foreclosure proceedings. The real estate can be sold to pay tax debts.

Property tax bills are usually divided into three categories including: school districts, county and municipality. Approximately 60- to 70-percent of property taxes are allocated to schools to cover education costs. The remaining 30- to 40-percent are distributed amongst county and local government agencies.

Tax rates remain unchanged unless increases are passed through government legislation. Property tax assessments are subjective and often vary from year to year. Multiple factors are involved when assessing real estate values.

Real estate appraisers can assess property values on comparative sales reports of other properties in the area which have sold within the previous six months. Other factors may include the historical value of the real estate or potential value if the property is used to generate income through house flipping, rental, lease-to-own, or seller carry back trust deeds.

Property owners have the right to contest tax assessment if they feel they are being overcharged. Government agencies and tax assessors do make mistakes, so it is important for homeowners to check each valuation statement for accuracy. Things to look for include: correct address, lot size, number of rooms, and square footage.

Contesting tax assessments requires time and patience. In most cases, homeowners must schedule an appointment with a property tax representative. Homeowners should always retain previous years’ tax bills in order to compare previously reported information. If mistakes are discovered, adjustments are reflected in future tax bills as opposed to providing refund checks.

Property owners should take time to determine if they qualify for any tax exemptions. The most common is the Homestead exemption which allows taxpayers to deduct exemptions for real estate used as a primary residence.

Homestead exemptions are usually a fixed amount. Florida provides a $25,000 exemption, while Louisiana exempts the first $75,000 and California exempts the first $7,000. As you can see, homestead exemptions can vary greatly by state.

Mortgage lenders can provide estimated property taxes and exemptions when borrowers obtain a new home loan or enter into mortgage refinancing. Prior to filing annual tax returns, property owners should consult with a qualified tax accountant to ensure they receive all available tax deductions.