Are Real Estate Taxes the Same as Property Taxes?
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Summary:
Although they are sometimes used interchangeably, the terms “real estate taxes” and “property taxes” have different meanings. Real estate taxes are applied to real property that you own, such as land or a house. Property taxes are applied to your personal property or business property, which are items that you own but are moveable, such as a car or a solar-powered energy generation system.
When you think of the term property tax, you are probably thinking of the money you fork over to your mortgage lender or municipality on a monthly or annual basis. In reality (no pun intended), property taxes that you pay on your home were originally referred to as “real property tax,” and are now called real estate taxes. Other taxes deemed “nonreal property taxes,” or just property taxes on items other than homes, are defined a bit differently. Although confusing, it’s important to understand these concepts, particularly if you personally own many items of value or a business.
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Real estate taxes and property taxes: What’s the difference?
It’s true that people often refer to their real estate taxes colloquially as “property taxes.” But technically, real property taxes or real estate taxes refer to taxes on property that is fixed and immovable, such as a house or land that you own, while personal or business property taxes are for property that is transportable and not fixed.
Let’s break down how both types of taxes work below.
Real estate taxes
Real estate taxes are typically levied on an annual basis. Most of the time, if you have a mortgage, your lender pays real estate tax on your behalf out of your escrow account, so it’s included in your monthly mortgage payment. If you own the real estate free and clear, then you’ll need to pay the taxes directly to your local government.
The mill levy system
Almost all real estate taxes and personal property taxes, particularly those that apply to businesses, are based on a mill levy system. A “mill” works as follows:
1 mill = $1 tax for every $1,000 of assessed value
Your local government will determine the assessed value of your home and subtract any exemptions for which you qualify. They will also determine how many mills they need to charge each resident in order to make their budget work.
To calculate tax, the equation is as follows:
Assessed value x mill levy / 1,000 = property tax due
So let’s use an example of a $100,000 home with a mill levy of 20.
$100,000 x 20 mills = $2,000,000 / 1,000 = $2,000
As you can see above, with an assessed value of $100,000, the property owner would owe $2,000.
Different real estate taxes will be levied on different types of assets. A residential property might have a different tax rate than a commercial property, for example. Also, some municipalities, such as Denver, Colorado, use different methods to calculate their assessments.
Example: Real estate taxes on homes in Denver
In Denver, they calculate the assessed value as a small percentage of the actual value of the property. Then they multiply that by the number of mills and divide by 1,000 to come up with a real estate tax amount. These are the percentages used:
- The assessed value for single-family residential property = 6.95% of actual value
- The assessed value for multi-family residential property = 6.80% of actual value
- The assessed value for non-residential real property = 29% of actual value
Those percentages make for a property tax that is actually quite low. Using this calculation and a mill levy of 79, you can see how the city taxes a $500,000 commercial property.
| Real Estate Value | $500,000 |
|---|---|
| Assessed Value Rate | 6.95% |
| Assessed Value | $34,750.00 |
| Mill Levy | 79.525 |
| Taxes Due | $2,763.46 |
It’s important to note that if you are buying or developing land, then your real estate taxes can also come in other forms. Kim Kim, a principal at K2 Environmental Professionals, has seen these types of “hidden” real estate taxes before.
“Beyond the overt ‘property tax,’ there exists a less visible yet potentially more significant ‘tax’ associated with environmental due diligence,” she says. “This hidden ‘tax’ arises from potentially contaminated soil and groundwater, a matter often misunderstood or overlooked by many investors or buyers. Costs associated with testing, remediation, and obtaining regulatory clearance can pile up, creating unexpected financial burdens.”
Pro Tip
Real estate or property taxes are also not the same as school taxes. In fact, they are often confused, according to Ryan David, the owner of We Buy Houses in Pennsylvania. “If you live in a state that collects school taxes, that’s something an investor will want to consider. Most people don’t understand that property taxes and school taxes are NOT the same thing. In many states, you will get two separate bills. In some states, school taxes surpass even property taxes, so it’s something an investor will need to consider before investing in a specific area.”
If your head is spinning trying to figure out your tax bill, it might be time to turn to a tax preparation service for help.
Property taxes
Property taxes are taxes levied on items of value that are “movable,” meaning that they can be transported or moved from one place to another. They are sometimes referred to as “personal property taxes” or “business property taxes.”
Personal property taxes
Personal property tax refers to the levy on assets of significant value that a person owns, such as a car or boat. In many cases, these are not taxed with a mill levy formula and are instead paid via local government registration. For example, when you register a car or boat with a county or municipality, you pay a fee to the government, usually a percentage of the car’s value, which covers your personal property taxes.
Business personal property taxes
Business property taxes are similar to personal property taxes, except the property is owned by a business instead of a person. Unlike personal property taxes, business property taxes will sometimes utilize a mill levy system.
Example: Denver business property taxes
Denver currently has the following business property tax rates:
- The assessed value for renewable energy business personal property = 26.4% of the actual value
- The assessed value for all other business personal property = 29% of the actual value
You can see above that the City and County of Denver offer different tax rates for businesses if their business personal property is tied to renewable energy. That isn’t to say that the company must be involved in the renewable energy business; it simply means that if the personal property uses renewable energy, then the taxes are lower.
Example: Tax on a $200,000 solar power generation system
| Solar System Value | $200,000.00 |
|---|---|
| Assessed Value Rate | 26.40% |
| Assessed Value | $52,800.00 |
| Mill Levy | 79.525 |
| Taxes Due | $4,198.92 |
Pro Tip
Solar-powered systems attached to a home or business have traditionally been considered “personal property” and not part of “real property.” This has changed in the last few years, and now certain cities and counties in the United States include solar panels as part of their real property assessment. However, each state, municipality, and county will differ, so it’s best to check with your local tax assessor.
FAQ
Are real estate taxes and property taxes calculated differently?
Real estate taxes are almost always calculated using a mill levy system. Personal property taxes, whether business or personal, can be calculated via a mill levy system or through a registration fee. Furthermore, real estate taxes can sometimes come in the form of fees, such as those for environmental studies that need to be conducted on land.
Who is responsible for paying real estate taxes or property taxes?
The real estate or property owner is responsible for paying property taxes. However, in the case of a mortgage, the lender will often pay property taxes on your behalf using money an escrow account, but you are ultimately responsible for the cost. The owner of the actual asset who is listed on the title is responsible for paying property taxes either directly or on their behalf.
Can real estate taxes or property taxes increase or decrease over time?
Yes, they can both increase and decrease over time, depending on the county’s or municipality’s politics and funding needs. Sometimes the mill levy can be increased for a certain purpose, like building a stadium or improving public transportation.
Are real estate taxes or property taxes deductible on my income tax return?
Yes, they can typically be deducted from your tax return but with limits. This is true for personal property such as a boat or a car. This is for personal income taxes only; businesses are taxed differently. When a business owns property, the structure of the business (i.e. sole proprietorship v. S Corp) will determine how that property is taxed. If you are unsure about what you can deduct, consult a tax professional.
Key takeaways
- Real estate taxes are applied to real property that is immovable, and property tax generally refers to taxes on personal or business property, which is movable.
- Many times, real estate and property taxes are calculated using a mill levy system, which works differently than a simple percentage tax on the value of the property or real estate.
- Real estate taxes and property taxes are unique to their own county, municipality, and even school district. Each place will have its own local tax rate and calculation method.
- Sometimes governments will give tax incentives for certain types of personal property, such as those that feature renewable energy.
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