If you own a house or car, you’re probably familiar with property taxes. Local governments levy these taxes and use the money to pay for projects and services that benefit the community -- like schools, libraries, road construction, and emergency services.
There are two types of property taxes -- one for real property and one for personal property -- and the type you need to pay comes down to whether the property in question can be moved.
What are real property taxes?
Real property taxes (also called real estate taxes or just "property taxes") apply to immovable property, including land and any structures that are permanently attached it. Examples include houses, garages, and other improvements.
You pay real property taxes directly to your local tax assessor each year, or they can get rolled into your monthly mortgage payment. The tax is calculated by multiplying the assessed value of your home by the local tax rate. For example, if your home’s value is assessed at $200,000 and the tax rate is 1.5%, you’ll owe $3,000.
All property owners pay real property taxes. And you continue to pay real property taxes as long as you own the home -- even after you’ve paid off the mortgage. Moreover, real estate tends to appreciate and local tax rates tend to rise. That means your tax bill is likely to increase over time.
It’s a good idea to take a close look at your assessment. If you think your home is valued too high (and you’re overpaying your taxes), you can file an appeal with your local tax office.
What are personal property taxes?
Personal property taxes are imposed on certain movable property, including cars, mobile homes, RVs, boats, planes, snowmobiles, and personal watercrafts. Typically, you pay these taxes each year when you renew your registration, such as when you get a new sticker for your car.
Only about half of the states in the U.S. charge a personal property tax. If your state does, it will be based on the current value of the property. Since items like cars and boats tend to lose value as they age, the amount you owe typically drops over time.
Commercial property taxes
If you own commercial real estate, you will also pay property taxes. Like homeowners, you pay real property taxes on the assessed value of any land and improvements (the property is typically assessed at its "highest and best use"). Often, the tax rate for commercial properties is higher than residential rates.
Many jurisdictions also tax business personal property. This includes business equipment, fixtures, furniture, and other items that help produce income. If you live somewhere that imposes these taxes, you’ll be required to file a form (e.g., a Business Property Statement) each year to report your property. An assessor determines the collective value of your personal property, and then the tax office creates a bill and collects the tax.
Business personal property taxes can add up, so it pays to keep comprehensive records. Be sure to remove any assets from your list that have been disposed of, transferred to another location, or that are broken or unrepairable. Otherwise, you’ll be paying taxes on items you no longer use. Because keeping track of business personal property is complex, many companies outsource this job to property tax experts.
Can I deduct my property taxes?
If you pay real and/or personal property taxes, you can count the amount you paid towards your itemized deductions on your income tax return. This deduction is part of the SALT deduction -- the State and Local Taxes deduction. That federal tax deduction is now limited to $10,000 per year, thanks to the Tax Cuts and Jobs Act.
At the commercial level, the IRS says you can deduct any state and local taxes you paid on personal property used in your trade or business.
Taxes are complicated and rules change. It’s always recommended that you work with a qualified tax specialist to make sure you receive the most favorable tax treatment possible.