There’s a common misconception among many homeowners regarding the real estate tax and the property tax (technically referred to as personal property tax) and that’s the reason many use both the terms interchangeably. In casual conversation, using both terms interchangeably is fine, but it’s important to note that, technically, both these terms are distinct. Real estate taxes are referred to taxes levied on the assessed value of the home, the personal property taxes, referred to as property taxes, by many, are levied on movable items like cars, furniture, or equipment. In this article, we give a clearer view of both the terms for crystal clear clarity.
Key Difference Between Real Estate Tax and (Personal) Property Tax
| List of Criteria | Real Estate Tax | (Personal) Property Tax | |||
| Property type | Taxes are calculated on immovable property | Taxes are calculated on movable property | |||
| Place where tax is paid | Paid at local or state level | Paid at local or state level | |||
| Use of funds | Funds are used for community service such as state run schools and community service | Funds are used for community service such as state run schools and community service | |||
| When to pay | Payment date depend on the location | The property owner has to self report the property | |||
| Rate of tax | Real estate tax is anytime higher than the personal property tax | Personal property tax is lower than the real estate taxes because prices of property is always higher than the prices of movable property | |||
| Mode of payment | It is paid through monthly mortgage payment | It is taxed in the annual registration fee | |||
| Who should pay | It is paid by all the homeowners | It is only paid by those who own the movable property under the category of personal property |
What Are Real Estate Taxes?
The real estate taxes are the taxes paid by the homeowners annually to the local and state governments. These taxes are calculated on the assessed value of the immovable property, including land, a house, or a building permanently attached to the ground. The real estate tax varies from one city and state to another and is paid directly to the tax assessor or in the indirect form of monthly mortgage payment.
How is Real Estate Tax Calculated?
The tax is assessed by multiplying the market value of the property with the predetermined percentage of the municipality where you stay. For example, if the value of your house is $500,000 and the predetermined percentage of the municipality in your area is 70%, the total tax assessment value of the home will amount to $3,50,000( $500,000 x70%). The real estate tax will be calculated depending on the tax rate in your area. For example, if the tax rate is 5%, the real estate tax will amount to $ 17500. If the tax rate goes up, you will end up paying more taxes and vice-versa.
You must be aware that tax laws change constantly, so you must stay updated on these changes. Follow the changes in tax rates, find out about incentives or deduction limits, and regularly consult with tax professionals. Staying on top of things will help you proactively adjust your strategies, and that you are always compliant when maximizing your ROIs.
Where is Real Estate Tax Collection Used?
The tax amount is used to fund various local and state-run public schools and other services discussed below:
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Many schools are run on real estate tax money.
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Tax money is also used to fund public safety services such as police force and firefighters.
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Some common shared spaces like parks and ball fields are also funded by tax money.
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Sanitation work such as trash collection and cleaning of streets is also funded by real estate tax money.
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Public services such as libraries and animal shelters are funded by tax money.
What Are Personal Property Taxes?
Personal property tax, also used by many as property tax, is assessed on the value of movable or non-permanent items such as vehicles, boats, planes, farm equipment, and business equipment like furniture or machines. The license fee and the registration fee calculated on the vehicle’s value also fall under the personal property tax.
Utilize 1031 Exchanges
With a 1031 exchange, you don't need to pay capital gains taxes when you sell a property and reinvest the proceeds into a new one. This excellent regulation and strategy will help you grow your portfolio while preserving your investment without the immediate tax burden to bear. However, in order to qualify, you must follow strict timelines and rules, including identifying a new property within 45 days and completing the exchange within 180 days.
How Real Estate Tax Calculated?
The method of calculating the tax is similar to real estate tax, and the rate also varies from one city and state to another. Personal property tax is calculated based on the value of each individual movable item.
