The frequently asked questions about real estate tax
As property accountants, we are regularly asked about real estate tax. We will look to answer the below questions in this Article.
“Are you paying too much real estate tax?”
“What are the basics of real estate tax?”
“What are property taxes in the US?”
“How is the assessment ratio calculated?”
“When are real estate taxes paid?”
“What is the millage rate?”
“How are property taxes collected?”
“Who is exempt from paying real estate tax?”
“Is property tax different in each US state?”
“Who determines property valuation for real estate tax?”
“What happens if real estate tax isn’t paid?”
“How does this affect our UK readers?”
You may also be interested to know more about Business or real estate investments in the US if you are a resident in the UK thinking about moving to or living in the US.
If you live in the US and thinking about investing in the UK, our services for Business or real estate investments in the UK may be of interest to you.
Are you paying too much real estate tax?
As US/UK ex-pat tax experts, we know that navigating around real estate tax and property legislation in the US can be complex and confusing.
There are many reasons why British people living in the United States pay far more tax than they need. This is because:
-They do not know what they do not know.
-They have not spoken to a tax specialist that knows all the UK and US tax laws.
-Their accountants in the UK are not knowledgeable when it comes to the US tax laws under the IRS.
-Their CPAs are not knowledgeable when it comes to the UK tax laws under HMRC.
What are the basics of real estate tax?
As property accountants, we appreciate the importance of being tax-efficient in the US. Understanding the basics of real estate tax is a critical element in achieving this.
Whether an individual owns property and lives in the US or is a British ex-pat property investor in the US, understanding real estate tax and the legislation around it is vital.
History of US tax on real estate
Real estate tax (or property tax) in the US originated in colonial times.
By the 1800s, land was taxed in one state according to quality, in another state according to quantity, and in other states not at all. Procedures varied hugely across the US.
After the Civil War, property tax was developed to incorporate one uniform rate, which was introduced as a requirement in many US state constitutions.
Real estate tax today
Property tax has remained a major source of US government revenue below the state level since then.
Today, two-thirds of Americans are homeowners and are subject to paying real estate tax or property tax.
The average property tax annual bill per US household is $2,375, according to industry sources, but for some residents of some states, their payment might be twice that amount as all real estate tax rates vary.
New Jersey, for example, last year charged homeowners a 2.45% property tax rate, equating annually to a payment of $5,419 per property.
Most jurisdictions below state level in the US impose a tax on interests in real estate (land, buildings and permanent property improvements) that are considered to be ownership interests.
Real estate tax is based fair market value of the property and is generally attached to the property on a specific date. The owner of the property is liable for payment of the tax on that date.
The amount of property tax is predetermined by most US jurisdictions periodically, with an updated property value assessment.
Most US jurisdictions tax real property, including land, buildings and all improvements (called fixtures) that cannot be removed without damaging the property.
Real estate tax payment is liable on homes, farms, business premises as well as other types of property used in a business.
Property owned by charitable, educational and religious organisations is usually exempt from property tax.
We recommend that you review these real estate tax tips from the IRS before purchasing US property.
If you are unsure of your property tax position in the US, book a property tax strategy call with us.
What are property taxes in the US?
Property taxes are charged on real estate by the US government, usually at county and local levels.
In the US, property tax even pre-dates income tax. All US states have property taxes, and they are essential for state and local governments to operate.
Real estate tax accounts for revenue used to fund public safety, schools, infrastructure and the county government.
When purchasing property in the US, you will need to factor in the real estate tax as an ongoing cost.
Although not regulated by the federal government, it is based on state and county tax levies.
Your property tax bill will depend on the value of your real estate and where you live in the US.
How is the assessment ratio calculated?
Most US jurisdictions impose a property tax on a stated percentage of fair market value, called the assessment ratio.
This ratio may also vary depending on the type or use of the property.
The assessment ratio can also be changed annually by the jurisdiction’s governing body.
This assessment ratio is the ratio of the property value as determined by a county assessor and the value as determined by the market.
The market value of a property multiplied by the assessment ratio in an area equals the assessed value of that property for real estate tax purposes.
It is common for assessment ratios to be appraised annually, every five years, or somewhere in between.
In some US states, the assessed value is equal to the current market rate value of the property.
In other states, the assessed property value can be thousands less than the market value.
When are real estate taxes paid?
How real estate tax is paid varies from state to state in the US. Some pay extra each month to their mortgage lender, who keeps the money in escrow and then pays the government on behalf of the homeowner. Others pay their property taxes directly to the country government on a monthly, quarterly, semi-annual or annual basis.
Payment schedules for real estate tax are dependent on how each county collects their property taxes, which also varies widely across US states.
In many jurisdictions, real estate tax is due in a single payment by 01 January.
Some US jurisdictions provide for payment in instalments spread out across the year.
What is the millage rate?
The rate of tax is a percentage of the assessed value of the property subject to tax.
In some cases, this is referred to as a millage rate or dollars of tax per thousand dollars per assessed value.
Take your assessed value and subtract any applicable exemptions to then get the taxable value of your property.
The taxable value then gets multiplied by the sum of all applicable millage rates.
If you are unsure of the real estate tax position of US property, book a property tax strategy call with us.
How are property taxes collected?
Tax assessors determine property values in different ways but are generally required to base their determinations on fair market value.
Fair market value is the price for which an informed seller would sell the property to a willing buyer.
Popular estimation techniques used include comparable sales locally, depreciated costs being factored in, plus an income inclusion.
Property owners in the US can also declare a value, subject to change by the county tax assessor.
Once the value is determined, the tax assessor notifies the last known property owner of the value, which can also include a calculated amount of real estate tax.
After values are settled, property tax bills are sent to real estate owners. Payment times and terms vary.
Who is exempt from paying real estate tax?
Some of the most common property tax exemptions in the US include:
- Disabled persons
- Senior citizens
- Veterans & disabled veterans
Some US states offer real estate tax exemptions as an automated reduction without any involvement needed by the property owner if it is their main residence.
Somes states within the US, require applications and proof for specific exemptions to be provided, such as a homeowner who is a disabled war veteran.
Some jurisdictions may also offer temporary or permanent exemption from property taxes in the form of an incentive for a business to locate within the jurisdiction.
Other US jurisdictions provide real estate tax exemption for businesses located in certain areas or enterprise zones.
The biggest property tax exemption group is that of registered non-profit organisations.
All 50 US states fully exempt these organisations from state and local real estate taxes, with estimates ranging at up to $32 billion per year in potential property tax earnings being waivered.
If you are unsure of the tax position of your US property, book a property tax strategy call with us.
Is property tax different in each US state?
Property taxes are different in each US state, with a national average of 1.07% being paid per household.
Homeowners in New Jersey pay the most real estate tax, with an average effective rate of 2.42% of a property’s value.
Despite its reputation as an expensive place to live, Hawaii is the least expensive for real estate taxes, with a rate of just 0.28%.
Hawaii provides generous exemptions for primary residents, which helps those permanently resident in Hawaii rather than those who own a second property there.
Who determines property valuation for real estate tax?
The assessment process varies between US jurisdictions in terms of both procedure and timing.
In many states, assessment and collection of real estate taxes is a two-year process, with values being determined in the first year and tax assessed then paid in the second.
Most jurisdictions request property owners to declare the property value at the start of the assessment process.
Property owners are also given rights to appeal taxing authority decisions.
Owners of property are usually entitled to discuss valuations with a tax assessor, and these can result in changes to the decision of the amount given by a tax assessor.
What happens if real estate tax isn’t paid?
Property taxes are attached to each property, meaning that they become a responsibility real estate owner must satisfy.
This attachment (or lien) happens automatically without further action from a taxing authority.
The lien is removed upon payment of the property tax.
If real estate tax is not paid within a specified period of time, a tax sale is held, which may result in the sale of the property or a lien being sold to a third party who can then take action to claim the property.
The tax lien attaches to the property at a specific date, usually the date on which the tax liability becomes enforceable. This is also called the attachment date.
Where a property owner fails to pay the real estate tax by the due date, the taxing authority may assess penalties and interest.
The penalty and interest are enforceable in the same way as the tax itself and attach to the property.
Enforcement of a tax lien varies by US state, with the lien being sold by the taxing authority to a third party who can then attempt collection.
In most states, the taxing authority can seize the real estate and offer it for sale, usually at a public auction.
How does this affect our UK readers?
British owners may live or invest in the US. Property taxes may not be well known to British eal estate owenrrs/investors so you do need to ensure you understand the above. The property tax is a cost. As such it will help you reduce real estate property taxes both in theUS and UK.
To learn more, make sure you head over to our sister company, Optimise Accountants that helps Americans save tax in the UK.
It is one thing to be tax-efficient in the UK or the US; it is another thing to be tax-efficient across the Atlantic.
This is why you need to get a tax advisor that truly understands international tax.