How Are Property Taxes Calculated? Overview & Definitions
What are Property Taxes?
Property taxes are paid by any kind of real estate owner to county or local tax authorities
where its located. U.S. property tax varies according to the state, region, location, and
square footage of the property. Everyone is subject to property tax in the U.S., except under
special circumstances. Real estate, cars, securities, land, all these products have an annual
tax.
In short, U.S. residents are required to pay taxes each year to own property, except for the
property’s sale value. The tax rate varies depending on many conditions. Property tax is the
most important source of income for U.S. state governments. The fact is that income tax
applied at the state level is often insignificant and cannot meet all the needs of the
administrative unit. But the property tax provides about 80% of the state budget.
Property Tax Rates in The US
There are more than 140 million residential properties in the USA. United States commercial real estate total supply is 58,091,739 properties across the United States. The highest property tax is in Illinois.
As of 2021, the property tax rate is 2.22%. The lowest property tax in the U.S. is in Hawaii at
0.36%.
Local governments determine property taxes. For example, property tax in New York is 1%
on average, while it is 2% in Miami. The average property tax rate in Newyork city is approx
0.88%, while the Newyork state average rate is 1.69%. In short, property tax can vary from
region to region within the same state or the same city.
In Miami, there is no income tax for citizens. The main source of income for the state
government taxes on the property. On the other hand, New York City has higher property
tax rates than the state, as it has the state’s most popular residential areas.
What Is Income From Property Taxes Used For?
Property taxes are used by the city government where you live, mainly to finance public
works. In short, the local government needs income to meet the expenses of units such as
municipal services, firefighters, cleaning teams, police force, and to carry out the necessary
renovation, maintenance, and alterations in the roads, pavements, parks, and similar public
common areas in the region. The property tax is the source for all these services.
How Are Property Taxes Calculated?
The factors that determine the property tax to be paid for the houses in a neighborhood in a
city are the general popularity of the area, the value predicted for the house for which the
property tax will be calculated, and the tax policy of the local government. The value
calculated in these three headings determines the tax rate of your property.
• Evaluated value of a property: Current sales figures of properties that are similar to
yours and located in the same region are researched by an appraiser. A report
containing the valuation of the property is created, taking into account the supply-demand curve in the real estate sector and the characteristics of the house.
• Evaluated value of all other properties in a specific area: The overall value of
properties in a neighborhood, county, or city allow us to find the average baseline
figures for homes in that area.
• An annual budget of your local government: To obtain the budget needed for local
services, the local government calculates a value that it can derive from the total
number of houses in that area without conflicting with market conditions. Taxes are
created according to the local government’s budget, taking into account the first two
conditions.
These three points we have mentioned may cause an increase or decrease in property taxes
in the same region in a few years.
For example, a local government that needs to collect $1 million in property tax in that year
to create its budget finds the total value of 2000 properties in its area to be $100 million. In
order to collect the $1 million in taxes needs, Local officers will need to collect 1% property
tax. If you own a home worth $200,000 in the same area, you will have to pay $2,000
property tax.
U.S. Real Estate Market
The 2008 real estate crisis led to a major crisis in the U.S. real estate market. After the real
estate sector crisis turned into a mortgage crisis, the homes of millions of people who could
not pay their loan debts were confiscated by creditor banks. The recovery process in real
estate prices took four years. In short, since 2012, U.S. real estate prices have continued to
increase by about 10%-%15 annually on average.
Property Tax for Corporations
Another tax element that will concern corporations in the United States is a tax on real
estate. These taxes are per capita property taxes with a fixed value that varies by a
percentage of the state’s population.
The maximum capital stock tax, which determines the maximum value of the tax to be paid
for the securities, is used to prevent companies from incurring a loss due to taxes such as
effective property tax, capital stock tax rate, and “capital stock tax” paid from the cash flow
of companies, which vary by state, depending on personal income.
Companies are provided with a tax facility, which allows them to pay taxes on corporate tax,
not on the value of securities, if necessary. (capital stock tax versus income tax)
Taxation of Profit from the Purchase and Sale of Property
In many U.S. states, capital gains tax is payable on profits from property sales. For the U.S.
citizens, this tax rate is 20% on earnings. For non-US citizens, this tax rate ranges from 20%
to 35%, depending on the tax treaty between the buyer’s country and the U.S. and the
duration of ownership of the property.
Property Sale & Buy By Non-U.S. Citizens
When a non-U.S. non-U.S. resident makes a purchase or sale of real estate in the U.S., the
IRS seizes 15% of the gross sale of the property to ensure that capital gains taxes are paid to
their parties. After the capital gains tax is paid and the tax return is filed with the IRS, they will
release the 15% fee.