As a new homeowner, you’ll have a lot of new responsibilities. Renovations, home upkeep, monthly mortgage payments, and property taxes. First-time buyers may not be tracking their property taxes at closing, but it’s important to understand what they are and how they’re calculated. That way, you’re prepared when the time comes to seal the deal on your new home.
Read on to learn everything you need to know about property taxes for your new home.
What is property tax?
In short, property taxes are the fees paid to the state, local municipalities, and various government authorities that are used to fund schools, road upkeep, water/sewer line maintenance, plus other municipal services in the area. The exact total of these taxes, and who you will pay, will vary depending on the location you choose to live in, the assessed value of your property, and when you close on the home.
For example, let’s say you purchase a home assessed at $100,000 that is subject to a 2.5% tax rate. That means you would pay a total of $2,500 in property taxes each year.
Property tax payments may be due monthly, quarterly, bi-annually, or annually. They are often paid through mortgage escrow accounts, which are set up to collect payments monthly along with your mortgage payment. The mortgage company then pays the taxes on the homeowner’s behalf as they are due.
What is the difference between property taxes and real estate taxes?
The terms property tax and real estate tax are often used interchangeably. Technically, ‘property taxes’ can be used to describe taxes on types of property beyond homes and land (i.e. cars, boats, etc…), while real estate taxes refer specifically to real estate properties.
Will I have pay property taxes at closing?
There are a lot of fees buyers shoulder when a home sale closes. This includes property taxes, which are normally included in the closing costs.
Typically, it falls on both the buyer and the seller to pay property taxes at the time of closing. The seller usually pays a prorated amount for the time they’ve lived in the home since the beginning of that tax year. Likewise, the buyer pays their own prorated amount of the property taxes to cover the rest of that calendar tax year.
How much are property taxes at closing?
If both the seller and buyer are responsible for paying a portion of the year’s total property tax, the exact cost to each party will be based on the closing date and the amount of total taxes due. This is why the timing of when you close on a home matters.
Continuing with the example above, let’s say you close on June 27 and the total annual property tax amount is $2,500. Here’s how to calculate the total cost of property taxes for the seller and buyer at closing:
- Divide the total annual amount by 12 months to calculate the monthly payment: $2,500 /12 = $208.33
- Then divide the monthly payment by 30: $208.33 /30 = $6.94 per day on a 30-day calendar
- In this case, the seller is responsible for 6 months and 26 days of the year’s property tax:
6 X $208.33 = $1,249.98
$6.94 X 26 = $180.44
$1,249.98 + $180.44 = $1,430.42 is the approximate total amount due from the seller.
Using the same calculations, you can determine the buyer’s total amount due:
- The buyer is responsible for 5 months and 4 days:
5 X $208.33 = $1,041.65
4 X $6.94 = $27.76
$1,041.65 + $27.76 = $1,069.41 is the approximate total amount the buyer will cover.
Doing the actual math for your new home’s closing costs is typically the responsibility of your lender. They’ll provide you with information on the amount of cash due at closing that will take all of these numbers into account. But it’s helpful to understand how the math works so you can keep an eye out for any discrepancies when reviewing the paperwork.
First-time home buyer deductibles and tax credits
The IRS offers a property tax deduction. Homeowners may be able to deduct local property taxes from their federal income taxes, but there are limitations that include a cap to how much can be deducted. Real estate taxes are deductible in the year they’re paid, not the year they’re assessed. This means, if you’re a new homebuyer you will typically have to wait until the next tax year. It’s also a good idea to consider consulting a tax advisor for more insight.
Currently, there is no first-time buyer tax credit available at the federal level but that doesn’t mean there aren’t options available in your state. States sometimes offer their own assistance programs to help residents achieve homeownership. It’s worth researching what may be available in the area you’re moving to. The U.S. Department of Housing and Urban Development (HUD) offers a directory of local home buying programs by state.