Home values have been steadily rising for quite a while now. If you’re a homeowner, this is a good thing because it means you’re gaining equity more quickly and this equity can be converted into cash.
If you’re looking to buy, prices that are rising faster than the rate of inflation can indicate a good financial investment added to the obvious benefits of possibly having more space or just having it be a place of your own.
However, there’s a catch. Higher property values generally mean higher property taxes. To an extent, this is a fact of life. But that doesn’t mean you should pay more than you have to. Taking advantage of the exemptions that you qualify for can save you a ton of money.
This article will discuss exemptions and credits you should be on the lookout for as well as giving some basics on how property taxes work.
While we intend to give you good general educational information in this article, everyone’s tax situation is different. If you’re unsure of anything, contact your financial advisor or tax professional. You can also contact your local tax authority.
Tax Exemptions and Credits
There are two important mechanisms governments have to provide some measure of tax relief to qualified groups. These are exemptions and credits.
A tax exemption is a certain percentage of your taxes that you don’t need to pay. Tax credits allow the government to essentially give you free money. Common examples of this might include credits given by local governments to help first-time home buyers. These credits may or may not have to be paid back at some point. Even if they do have to be paid back, it functions like an interest-free loan.
Tax exemptions are more commonly offered than credits, so let’s take a look at a few of the most utilized categories.
The vast majority of states have a homestead property tax exemption that allows you to protect a certain amount of the value of your primary property from taxes. This can either be structured to allow you to exclude a flat amount or a percentage of your taxable value.
States often provide tax exemptions for seniors after they reach a certain age. The details vary based on the state and there are often residency and income restrictions as well. Some of the statutes just defer the taxes until the property is sold.
You’ll have to read the fine print, but it’s still worth looking into the tax laws in your area.
Exemptions for the Disabled
If you’re disabled, you may be able to get relief from some portion of your property taxes. In this case, there’s a wide variation in local policies.
Regardless of whether you qualify for property tax relief, there are a variety of potential exemptions and credits you could take a look at in other areas of your taxes. For example, home modifications to provide for ramp access or to make it easier to get around inside the house could be deductible on your taxes as medical expenses.
Exemptions for Service Members and Veterans
Service members and veterans are often able to exempt themselves from various taxes, including property tax. The details vary widely by what state you’re in, but it’s definitely worth looking into. Depending on your situation, you may be able to exempt a certain amount of property value or even get a complete waiver from property taxes.
What to Do If You Receive an Exemption
If you receive your exemption, please be aware of when it is applied based on when your bill is generated. This way, you can confirm whether or not you have an adjusted bill.
If you’re a Quicken Loans client who has confirmed an adjustment to your taxes before we’ve paid the bill, you can upload the letter to your Documents section within your Rocket Mortgage account or give us a call at (800) 508-0944, option 3.
How Your Property Taxes Work
Property taxes help support things like county, city or township government services as well as providing funding for your local school district. They’re calculated based on a unit called the mill.
If you remember the metric system from school, you may recognize the mill prefix. It means 1/1000th of something. Let’s say you had a county with $300 million in assessable tax value. Out of this tax value, each stakeholder decides (sometimes with the help of a public vote), how much they need to budget for various services. For example, if the school district decided they needed $1.5 million to run their operations, everyone’s property would be taxed 0.5%. ($1.5 million/$300 million = 0.5%). If the total property tax in an area was 3.5%, on a $200,000 home, that comes out to $7,000 in area property taxes.
Your property tax value may be based strictly on your home valuation, but that’s often not the case.
State laws sometimes limit your tax liability to a certain percentage of your property value. If you have a $200,000 home and the state limit for assessed tax value on the property is 50%, you only pay taxes on $100,000 worth of your property value.
Additionally, because it may be impossible or impractical to reevaluate the value of your house each year, sometimes the values are based on a median or average area value. In other areas, they may not reassess value every year but only when the property is sold or after a certain period of time.
Finally, states may impose limits on how much your property tax can go up each year, meaning even if your property value increased by 6%, the state may have a law saying that property taxes can only go up by 2%.
If you have an escrow account, it can help make the cost of property taxes more palatable by spreading it out over a 12-month period, but it still makes up a big portion of your monthly mortgage payment, so those exemptions can be important.
The IRS has more information on general deductions and credits. Consult your tax advisor or local tax authority before making any decisions.