At this time of year in Los Angeles County, millions of homeowners are scrambling to pay their property taxes. Here, property taxes are due twice a year – November/December and March/April. But what exactly are property taxes, and why do you have to pay them?
Property taxes are a tax levied on property owners, and are one of the oldest forms of taxation. Today, property taxes are a major source of funding for state and local governments in the United States. You can think of them as part of the cost of owning your own home, since you should take the amount of property taxes you will have to pay into consideration when deciding whether to buy a home.
Property taxes are assessed by local jurisdictions – in most cases, the county in which the property is located. Property taxes are generally calculated as a percentage of the fair market value of the property. The assessor can use different methods to determine the value of your property, including a sales evaluation (i.e., how much your property would sell for on the open market), the cost of replacing your property, or a rental income evaluation (i.e., how much rental income your property would generate). The first method – sales evaluation – is the most common method utilized to assess property taxes. When a property is sold, the property is generally considered reassessed, with the sale price regarded as the fair market value of the property. A property’s value may also be reassessed if there is a major renovation or improvement. If a property is not sold for many years, its assessed value and its actual fair market value may become divergent.
Property tax rates are determined by each jurisdiction. Therefore, property tax rates vary widely – from median rates as low as 0.14% in Louisiana, to 1.74% in New Jersey. The formula for taxation likewise varies by jurisdiction, and can usually be found on the web site of the assessor. For example, you can find the formula for San Francisco County’s tax rate here, and the formula for Los Angeles County’s tax rate here.
The bill you get for your property taxes should state the fair market value that was used to determine the amount of taxes you owe. You should review the basic statistics listed on the statement, such as square footage, to ensure accuracy. You should also check to ensure that any applicable reductions have been applied. For example, many jurisdictions provide an exemption for a property owner’s primary residence. In Los Angeles, the Homeowner’s Exemption reduces the average property tax bill by $70 per year.
If, after reviewing your statement, you disagree with the assessment of your property’s fair market value, you can appeal the assessment. The first thing you should do is find the exact procedure for challenging the assessment in your jurisdiction. You should be able to find the directions on your mailed statement or on the web site of the assessor. Be sure to note the date by which you must file your appeal. The deadline varies greatly by jurisdiction, so you should begin the process as soon as possible.
Depending upon the procedure in your jurisdiction, you may need to write a letter explaining why you believe the assessment of your property is incorrect, and/or provide an independent appraisal of your property, which should cost approximately $400. You will likely need to provide evidence in the form of comparable property sales in the area (frequently referred to simply as “comps”), showing that if you were to sell your property, it would sell for less than the assessed value. The more evidence you can present showing that your property has been overvalued in the assessment, the greater your chances of winning your appeal.
Failure to pay your property taxes can result in interest incurred on the tax that’s overdue, fines, fees, garnishment, tax liens and even foreclosure. If unpaid property taxes result in a lien on or foreclosure of your property, the debt will almost certainly appear on your credit report and lower your credit score.