Buying a new home is exciting, but it comes with some added stress. Whether you want an affordable fixer-upper, or you set your eye on a move-in-ready new build, purchasing a new home can feel overwhelming. Between taxes, down payments, and interest rates, there’s a lot to keep track of when financing a new home. But, if you have a solid understanding of taxes, a trustworthy lender, and a knowledgeable real estate agent, you’ll be well on your way to getting the keys to your new place.
To make the buying process easier, it helps to know what taxes you might owe after buying a home. If you find yourself asking, “Are real estate taxes and property taxes the same?,” this article will help you understand these and some related key terms.
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Are Real Estate Taxes and Property Taxes the Same?
In short, yes and no. Real estate taxes are a type of property tax, but the reverse isn’t always true. The term “property taxes” refers to multiple types of taxes on multiple types of property people might own. We’ll discuss the definitions of each type more fully below, but property taxes break down into two main categories: real property, or real estate, and personal property.
What Are Real Estate Taxes?
While people colloquially call them property taxes, the IRS uses the official term “real estate taxes.” Technically, real estate taxes are a type of property tax that you pay on the assessed value of your real estate holdings, or real property. Real property refers to any immovable property a person owns – land, buildings, permanent improvements (also called fixtures) – basically, any feature that cannot be removed from a place without causing damage.
Real property also breaks down into a handful of classifications that affect their value and tax rates. These categories include residential, commercial, industrial, and vacant properties. Many cities or towns will add additional classes according to their needs.
The amount of real estate taxes homeowners pay depends on where they live. They rarely cost less than .3% of the value of your real property and sometimes reach levels above 2%, as they do in Illinois. Every municipality determines how much its residents pay in real estate taxes by multiplying the fair market value of a home by a predetermined real estate tax percentage. This system aims at fairness, ensuring that if you own a single-family home, condo, apartment, or land, you will pay real estate taxes to your local government in a way that reflects the value of your property. However, those tax rates inevitably fall harder on lower-income homeowners.
Because individual cities and towns determine the local real estate tax rates, higher rates tend to cluster in and near large cities, popular destinations, and coastal areas, such as Los Angeles, New York City, Austin, and other places with hot real estate markets. Rural communities, on the other hand, generally charge lower real estate taxes.
As for making payments, most people pay their real estate taxes in two main ways. Homeowners can roll their taxes into their monthly mortgage payment and pay a little bit each month (the preferred method of the majority of taxpayers), or they can make a lump sum payment directly to the tax office in their city.
What Are Property Taxes?
As mentioned above, property taxes can refer to a few different types of levies. While people typically use the term as a name for real estate taxes, it can also come up in reference to personal property.
Personal property consists of any moveable items you own, such as cars, boats, ATVs, farm equipment, or other business equipment on which taxes apply. When you own moveable property, you must pay registration fees each year in addition to whatever sales taxes or loan interest you might incur. Like with real estate taxes, your city or state determines the personal property tax rate where you live and your property's assessed value.
What Is the Difference Between Real Estate Taxes and Property Taxes?
To reiterate, real estate taxes are one type of property tax, but confusion seems to arise as people use these terms interchangeably and because internet resources often contain inaccuracies. Investopedia often publishes useful and accurate financial information, but, at the time of this publication, their article on “Real Estate Taxes vs. Property Taxes: What's the Difference?” gets enough wrong that we decided not to link to it here. Instead, the Wikipedia sources do a better job of defining the key terms and explaining how these taxes work. We recommend directing any further questions about real estate taxes to real estate professionals, such as your agent or brokerage.
In sum, whether you pay real estate taxes, personal property taxes, or both depends on the type of property you own. Owners pay real estate taxes on immovable land and structures known as real property, including homes, owned apartments, condos, or parcels of land. Personal property taxes are paid on the assessed value of moveable items, such as cars, trucks, boats, or large equipment. Lenders will normally roll real estate taxes into your monthly mortgage payment, and pay them to your local government, while personal property taxes are paid when you register a vehicle or piece of moveable property. Both of these taxes provide revenue that goes to local communities to fund initiatives like schools, roads, and infrastructure improvements.
How Can I Reduce My Real Estate Taxes or Property Taxes?
Local governments set real estate tax rates, so it can be difficult to reduce your taxes quickly. However, you can keep your taxes lower in a few ways. For starters, if you think the assessed value of your home is too high, you can file an appeal. Because real estate tax percentages apply to the market value of your property, winning an appeal could lower the tax assessor’s number and, therefore, your taxes.
Likewise, since permanent improvements (roofs, fences, landscaping) increase your home’s value, don’t upgrade or add on to your home right before a property assessment. These changes will boost the property’s assessed value and increase your taxes as a result. On the whole, the value added by any recent improvements will decrease each year, but your home and land value will likely increase.
Lastly, research tax exemptions in your area. Certain groups can qualify for exemptions, including older adults, veterans, people with disabilities, and agricultural properties.
Looking to Buy a Home?
Now that you better understand real estate taxes, you might feel a little more equipped to buy a home. At The Nav Agency, our professional team works hard on your behalf to find the perfect home in the city of your choice. We provide personalized service to every client throughout their luxury home search. Contact us today to find your new place.
After you buy your home, the moving process begins. Learn How to Choose a Moving Company, load up your Packing Playlist on your favorite device, and prepare to Unpack Your Essentials on the first day of your move.
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– Written by The Nav Agency Staff
