If you’re thinking about purchasing an investment property, you may be wondering how the property taxes would be determined for this large purchase. Fortunately, determining property tax for an investment property is no different than determining property tax for a home you would be living in.
Investors are the ones responsible for paying property taxes, and not the renters of the property. Some investors may choose to break up the property tax burden into the monthly rent of the property, putting some of the onus of these taxes on the renter. No matter how a property owner chooses to pay them, property taxes are ultimately the responsibility of the person who actually owns the home. As you decide whether purchasing an investment property is right for you, property taxes are an important expense to consider.
Assessing Property Tax
Property taxes are a major source of income for local governments and school districts. Property taxes are used to pay for services within a city or district, such as public education, public transportation, emergency services, parks and recreation, libraries, and any other services and amenities a particular city chooses to offer. Homeowners’ property taxes are the way a city keeps its budget in check and determines which services your city has to offer.
The type of property also determines how much is paid in taxes, and this determination is made during an assessment. For most rental homes, you will be assessed for the land and the house that is on the land. Sometimes, different types of properties have higher or lower values, based on the use of the land. For example, a vacant lot would be assessed at a lower property value than a lot with a home on it already. A lot that has the potential to be developed and has a desirable location in the city would be assessed with a higher value.
The amount of property tax owed is based on a percentage of what the land and property are assessed at. Depending on your local laws and regulations, a property appraiser from the city or county will be the person to determine the assessment of your property.
Calculating Property Taxes
Property taxes are calculated using the value, or assessment, of the property, including the land and any buildings on the property. In general, assessors will determine the value of a property every one to five years and will charge the homeowner the appropriate rate the following year. Standards determined by the taxing authority, such as the millage tax, also impact the total cost of your property taxes.
The mill levy is the tax rate levied on your property. One mill represents one-tenth of a cent. For example, for every $1,000 of property value, the homeowner’s tax would be $1. This is the same process for owners despite the use of the property, whether you live in or rent out the home.
Tax levies for different jurisdictions are calculated separately and each of the stakeholders has a different mill rate for tax purposes. Add all of the mill rates together, and you have your total property mill rate. This can then be used to calculate, or even estimate, the total amount of property tax owed.
For example, if your area’s mill rate is 9.5 and your home’s assessed value is $300,000, you can estimate what your property taxes will cost with the following equation:
9.5/1000 = $0.0095
$300,000 x $0.0095 = $2,850
Your estimated property taxes for the year would be $2,850.
Investment Property Depreciation
One difference in taxes for investment properties comes in the form of depreciation. If you own an investment property, you are allowed to deduct the depreciation of the property from your personal taxes. Local property taxes can also be deducted from your final tax bill on an investment property.
There are other ways to limit your tax liability for an investment property, such as deducting any costs to service, management, or maintenance of the property for renters. Determining the amount that can be depreciated from your property must be done using a specific formula from the IRS.
It’s best to work with a professional when trying to determine the property tax and depreciation of your investment property. Someone well-versed in taxes and investment properties can put you on the right path and make sure you get the most out of your asset.
If you’re shopping around for a mortgage, look no further than First Fidelis. We work one-on-one with every customer to ensure they are receiving the best interest rate possible. Contact us today at 913-205-9978 or get started with our pre-approval application.