Real Estate Taxes vs. Property Taxes

If you’re in the market to buy your first house, you might be hearing about real estate taxes for the first time. More confusingly, you might also hear the term “property taxes” when speaking about the taxes that you will pay on your future home.

The concept of real estate taxes vs. property taxes can cause quite a headache, especially when they are interchanged often. Keep reading for a detailed explanation of what real estate and property taxes are. We’ll also go over how these differ from personal property tax, another form of tax that may be new to you. Remember that taxes don’t have to be difficult; TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for. If you have questions, a TurboTax Live expert can help you along the way or fully do your taxes for you.

What Are Real Estate Taxes?

Real estate taxes, commonly known as property taxes, are annual taxes that homeowners pay based on the assessed value of their homes. It’s important to note that it’s not just your house that is subject to these taxes; it’s any piece of immovable land that is considered yours, including:

• Buildings
• Land plots
• Any commercial property that you may own.

Real estate taxes are paid to state and local governments and serve a multitude of purposes, including:

• Schools: Many schools use real estate taxes to help maintain schools and pay teacher salaries. 
• Safety: These taxes help fund public safety throughout the community, such as the police force, EMTs, and firefighters.
• Spaces: Shared outdoor spaces like parks, ball fields, and nature preserves are maintained by real estate taxes. 
• Streets: Real estate taxes go toward the construction and maintenance of roads. 
• Sanitation: In most areas, street cleaning, trash collection, and sewer management are funded by real estate taxes. 
• Services: Real estate taxes fund public services such as libraries, animal shelters, and local health departments. 

How are real estate taxes calculated?

Real estate taxes vary greatly based on several factors, even if you have multiple properties within a few ZIP codes of each other! Factors that can impact how much you’ll be paying for real estate taxes may include:

• Local average home value
• Weather events
• Tourism
• Success of local businesses

While the amount owed varies, the national average real estate tax is $2,471. It’s important to note that some states have property taxes lower than 0.5%, while others have rates higher than 2% of the home’s assessed value.

The real estate tax rates are set by city and state officials. They calculate rates by multiplying the fair market value of a home by the predetermined percentage in that city. Usually, larger cities such as New York City or Los Angeles have higher tax rates. This is due to the higher fair market value of their homes.

Keep in mind that there are ways to lower property taxes, which might be helpful if filing an appeal on a high assessment. 

Additionally, these factors can drive up the cost of real estate taxes:

• Renovations: Certain home renovations, like finishing a basement or installing a fence, can increase your home value. In turn, it can increase your real estate taxes. 
• Neighborhood changes: If your neighborhood is gaining popularity, most likely, the cost of available homes also increases. This can increase your home value, even if you didn’t make any changes to your existing property.

How are real estate taxes paid?

Property taxes can be paid with your mortgage payment every month. This is known as impounds. Or you can pay your property tax payments outside of your mortgage payments twice a year by the installment deadline.

Depending on the terms of your home loan, you may be required to pay your property taxes with your mortgage payment. If this is the case, property taxes are split up into installments that are included in your monthly mortgage payment.

These installments are held in escrow until the property tax due date. Then, the bank or lender will pay them for you. 

As the lender estimates the cost of the property taxes ahead of time, you might end up underpaying the property tax fee based on the current escrow. If this happens, your escrow payment will be increased appropriately going forward. Likewise, if the lender estimates too high, you’ll be entitled to a refund.

You’ll be able to pay your property taxes directly to your local tax office twice a year if:

• You’re not required to pay your property taxes with your mortgage.
• You don’t have a mortgage loan.

You’ll be billed in the mail for the first and second installment payments with instructions on where to send payment to and how much the payment will be. 

If you’ve paid at least $600 in mortgage interest during the previous tax year, you’ll be receiving an IRS Form 1098, where box 10 tells you how much you’ve paid in property taxes.

What are personal property taxes?

Although personal property taxes may sound interchangeable with property taxes, they are not the same. Personal property taxes are the annual tax on the movable things that you own. These include things like:

• Boats
• Planes
• Recreational vehicles

If you own a business, this tax could be imposed on:

• Furniture
• Tools
• Equipment

Personal property taxes can look a little different than real estate taxes. For example, the fee that you pay for your annual vehicle registration is a type of personal property tax. In addition, some states impose a flat rate across all personal property types. Meanwhile, other states have different rates for different types of personal property.

Generally, these taxes are paid at the state or local levels. However, some areas don’t require taxes to be paid on personal property at all.

How do personal property taxes work?

Similar to real estate taxes, personal property taxes are calculated as a percentage of an item’s value. Unlike real estate taxes, this value (and, in turn, the tax) typically decreases over time as the perceived value also decreases.

Generally, these taxes are self-reported on your tax returns. In addition, most municipalities will consider a certain amount of property as exempt from taxes. For example, if your city exempts the first $60,000 in personal property, but you own $80,000 worth, you’ll be required to pay taxes on the remaining $20,000.

How are personal property taxes paid?

Depending on your location, you may need to register certain purchases with your local tax office by completing a form. You may not be required to file these forms if the total value of your personal property is less than a certain amount.

Personal property taxes are usually paid to the local government where you reside. The process varies from location to location but often involves assessing the value of your personal property, such as a vehicle, and then paying the corresponding tax. Check with your local tax office or tax collector office for specific instructions for your area. 

Real estate vs. property taxes

 It may be confusing to keep these two types of taxes separate. This is partially due to how often the terms “real estate taxes” and “property taxes” are used interchangeably. However, there is a way to keep these two straight:

• Real estate taxes (or property taxes) are paid on immovable assets.
• Personal property taxes are paid on movable property assets.

Another way to think about this is to understand that real estate tax (i.e., property tax) is based on just that — real estate. Personal property taxes are then based on personal property — property you own that is not real estate.

Paying real estate vs. personal property tax 

Understanding the difference between real estate taxes vs. personal property taxes helps you meet tax deadlines and avoid missed payments. In this next section, we’ll talk about when personal property tax vs. real estate tax is due and what you can do to ensure you’re making on-time payments.

When is real estate tax due?

While real estate taxes are annual, the actual date that they are due varies by state and even city. 

Do you pay your real estate taxes with your mortgage payment? If you have your property taxes impounded in your mortgage payments, the lending company will take care of sending the taxes you paid held in escrow to the tax authority. If you’ll be paying through the city or town you live in, you’ll be billed accordingly. 

Typically, property taxes are paid in two installments with the first installment being due by November 1, and the second installment is due February 1. You can check with your city or town’s website for further information on tax deadlines.

When is personal property tax due?

Generally, personal property taxes are assessed and due annually on January 1 of each year. Remember that when you make purchases of certain personal properties, you may have to register them with your local tax office. Typically, you can do it either online or in person. When you do, you may need to describe the details of the property.

Which is more expensive, real estate or personal property tax?

When it comes to real estate taxes vs. personal property taxes, it’s important to keep in mind that tax rates vary. They might be higher or lower than average based on your location and the value of your property. Personal property taxes may be more expensive for businesses, but it depends on your location.

According to a report based on five years of Census data, Alabama had the lowest real estate taxes of any state, with a median of $646. New Jersey had the highest real estate taxes, with a median value of $8,797. These numbers show exactly how much real estate taxes can fluctuate.

Are real estate and personal property tax deductible?

Generally, if you itemize your deductions, you can take a deduction on your federal taxes for state and local real estate tax and state and local personal property tax. As an individual, the total amount of deductible state and local taxes is limited to a combined total of up to $10,000 per year ($5,000 if married filing separately). Certain miscellaneous fees that may appear on your tax bill, like a violation citation fee, that are not part of your real estate tax are not deductible. 

Mobile homes: The special circumstance 

Understanding the differences between the two tax types can be confusing. But there’s one special circumstance that can cause even more confusion: mobile homes. Under the definition of personal property tax, anything that is movable would be subject to this tax, including:

• Cars
• Boats
• Trailers
• Mobile homes

However, a mobile home is considered a permanent, immovable property and subject to real estate taxes if:

• It has its wheels removed
• It’s permanently fixed to a foundation
• You own the land beneath it

We know understanding the differences between real estate taxes vs. property taxes can be challenging. Hopefully, this information helped clarify the difference.

Remember: If you own property like a house, land, or business, you’ll need to pay real estate taxes yearly. Depending on where you live, you’ll also need to pay personal property taxes on movable assets like:

• RVs
• Trucks
• Boats

Real estate vs. personal property taxes: Key takeaways

While real estate and property taxes may sound like interchangeable terms, there are some key differences, including. 

• Real estate taxes apply to real estate, including condos, apartments, and homes.
• Personal property taxes apply to movable property, including cars, computers, and certain types of equipment.
• Property taxes are generally self-reported, while real estate taxes have specific deadlines depending on your location.

Don’t worry about knowing the ins and outs of real estate and property taxes. No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.