Both types of taxes are assessed based on the value of your property. The key differences are what counts as real property vs. personal property and how each type of property is taxed. It’s understandable if you’re confused, but you don’t have to be. Read on to learn the important differences between real estate taxes and personal property taxes.
What Are Real Estate Taxes?
Real estate taxes are levied on “real property,” which the IRS defines as land and anything that’s built on or permanently fixed to it. That includes buildings such as houses, condos, industrial buildings, and garages, as well as the ground beneath them. That’s why most people casually refer to these taxes as “property taxes”—real estate taxes and property taxes are the same thing. Counties or local municipalities charge property taxes on the real estate you own to raise funds for their operational budgets, said Thomas J. Williams, an accountant and co-founder of tax website Deducting the Right Way, in an email to The Balance. “It helps offset the cost of offering public services, safety, and schools.”
How Do Real Estate Taxes Work?
Property taxes are calculated by multiplying the real estate’s assessed value by the local tax rate. Williams said this is known as an “ad valorem” tax, which is Latin for “according to the value.” Tax rates can vary by state, county, city, and even school district. Tax-Rates.org reported the median property tax rates by state in 2020, which ranged from 0.18% in Louisiana to 1.89% in New Jersey. For example, if you own a home in New Jersey that’s worth $250,000, you could expect to pay $4,725 per year in property taxes. All real estate owners pay these taxes, and it’s important to pay them in full and on time. “Failing to pay a property tax bill can cause the municipality to issue a lien against the real property and engage in foreclosure actions,” Williams said.
How Do You Pay Real Estate Taxes?
If you are financing your home, it’s common for the property taxes to be split up into installments and tacked onto your monthly mortgage payments. The funds are held in an escrow account until property taxes are due, and the lender will pay them on your behalf. Note that if the lender’s estimate is too low, you will end up underpaying property taxes based on the current escrow. In such a case, your escrow requirements would automatically be increased accordingly each month going forward. To come up with the amount for your monthly payments, your lender will estimate your annual tax bill. If the lender’s estimate is too high and you end up overpaying, you’ll get a refund. This should happen automatically, or you can fill out a refund request form on your county or municipality’s Treasury website. In other cases, you can pay your property taxes directly to your local tax office. You’ll receive a bill in the mail with payment instructions.
What Are Personal Property Taxes?
Though their name sounds similar to real estate or property taxes, personal property taxes work a bit differently. “This refers to the annual tax imposed on what the IRS terms ‘movable assets’—things like a boat, a mobile home, [an] RV, or a plane,” said Michael J. Franco, a licensed associate real estate broker at Compass, in an email to The Balance. The fee you pay to register your car every year is one example. For businesses that are required to pay these taxes, personal property might also include equipment, appliances, furniture, and tools.
How Do Personal Property Taxes Work?
Personal property taxes are also calculated as a percentage of an item’s value, which typically decreases over time as its perceived value goes down, Franco said. These taxes are charged by county or local jurisdictions, which may choose to include different types of property in the tax assessment. Williams noted that these taxes are usually self-reported on your tax return. Additionally, most municipalities will exempt a certain amount of property from being reported. For example, if your city exempts the first $50,000 in personal property and you own $70,000 worth, you’re only required to pay taxes on the remaining $20,000. Again, be sure to pay your personal property taxes on time. “Failing to pay or report tangible property can lead to fines and liens against the property,” Williams said.
Real Estate Taxes vs. Personal Property Taxes
It can be tough to keep the differences between real estate and personal property taxes straight, especially since the terms “real estate taxes” and “property taxes” are used interchangeably. Plus, both real estate and personal property taxes are calculated according to the assessed value of the asset. Of course, if you need help sorting out your tax situation, it’s always a good idea to talk to a local, experienced tax professional.
The Bottom Line
If you own real property or land, you will have to pay real estate taxes every year. In many cases, you’ll also need to pay personal property taxes on moveable assets. It’s crucial to make sure you pay these taxes on time so you don’t risk losing your property.
