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I currently rent, but have been looking to buy a home. I always imagined how great it would be to have a dream home, worth, say, $500K, and to have it fully paid off. My thought was the only recurring fee I would have to pay is for utilities to keep the home running.

Then I learned about property tax. It looks like for a $500K home, annual property tax can be anywhere from $3-7K (~$500/month).

What if someone has no income and isn't able to cover the tax? What is the purpose of it? The idea of having to pay a recurring fee on land bought and paid for makes me really uncomfortable. Maybe someone can share some insight to put me at ease?

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As a home gets paid off, the repair costs continue to rise. Don't underestimate this. What would be cool is to manage to move to an equally sized younger home. A new, fully paid home, is the dream. – JoeTaxpayer Dec 1 '12 at 0:27
Ignore the politics and read this. It describes what taxes pay for. Some folks want to pay it, some don't. Your personal finances and opinions about your budget should dictate where and if you purchase a home. It is much more than paying for land. – MrChrister Dec 1 '12 at 4:53
If it still makes you really uncomfortable, Safford, TX has no property tax. – Chelonian Dec 2 '12 at 5:41

5 Answers 5

up vote 17 down vote accepted

Property taxes, where they exist, are generally levied by cities, counties and other local-level administrative bodies like MUDs, and are the primary source of revenue at these levels of government. These taxes pay the lion's share of the expenses for basic services provided by a city or county:

  • Local road maintenance/signs/lights
  • Utilities infrastructure (water/wastewater/trash are typically city-administered; electrical and telecom it handled more directly by providers but government has a hand in it)
  • Local first responders (police/fire/EMS)
  • Local government offices (courts, county clerk, commissioner, animal control)
  • Mass transit subsidies (lowers the ticket price to encourage ridership by making everyone pay a little from their other taxes whether they ride or not)
  • Municipal facilities (parks, pools, etc)
  • Public schools and interscholastic facilities (teachers' salaries, building maintenance/upkeep, administration, athletic facilities)

There are federal dollars, other revenue sources (State lottery revenues often go toward public schools for instance), and "usage fees" (vehicle registration, utility bills, toll roads) at play as well, but a lot of that money covers larger-scale infrastructure development (freeways/interstates) and specialized "earmarks" (political backscratching involving this bridge or that dam in a Congresscritter's home district, a few national initiatives from the President's budget like first-responder technology upgrades for improved disaster/terrorism readiness). Property taxes are the main funding for the day-to-day government operations at the most visible level to the average resident.

The theory behind using a property tax instead of some other form of taxation (like income) is that the value of the property and the quality of services provided to the resident(s) of that property are interrelated; the property is valuable in part because the infrastructure is well-maintained and nearby schools/hospitals are good, and by the same token, affluent residents expect high-quality services. Property taxes are also easier to levy, because most of the work can be done by the tax assessor; monitor recent sale prices, do drive-bys through neighborhoods, come up with a number and send the resident the bill. That's opposed to sales taxes which businesses operating in the jurisdiction have to calculate, collect and turn over, or income taxes which require residents to fill out paperwork to calculate how much they owe.

The justification is eminent domain. It's very simple; when you buy land in the U.S. and a State thereof, you are still a citizen and/or resident of that State and the U.S., and subject to their laws. You're not creating your own country when you buy a house. As such, the government charges you for the facilities and services they provide in your area and your State, which are then your privilege to use. Obviously roads aren't free; a one-mile stretch behind my house is costing the county $15 million to expand it from 2-lane to 4-lane.

Here's the kicker; you've already been paying these taxes. You think your landlord's just going to take the property taxes for the whole apartment complex on the chin? He's out to make money, and doing that requires charging a sufficient amount to cover costs, including taxes he incurs. You just never see "allocated property taxes" as an item on your rent statement, just like you don't see "allocated landowner mortgage", "allocated facilities maintenance", "allocated gross margin" etc. You know you're getting shafted, paying someone else's financing with a little extra on the side to boot. That's why you want a house.

Unfortunately, not being able to pay these taxes is a grim reality for some people, old and young, and government generally doesn't go easy on delinquent homeowners. After medical bills and mortgage delinquency, property tax delinquency is the number three reason for bankruptcy, and only a mortgage or property tax delinquency can cause your home to be seized and sold. Well that and using it for criminal enterprise, but unless you're running a meth lab in your half-million-dollar home or financing it with coke money I wouldn't worry about that score. Retirement planners figure property taxes into cost of living, and they do often advise a downgrade from the 2-story house you raised your children in to something smaller (for many reasons, including lower taxes).

There really isn't a way to structure a completely "pay-as-you-go" metropolitan area, and you wouldn't want to live in it if there were. Imagine every strip of asphalt in the county being a toll road where your transponder (TollTag, EZ-Pass, etc) or license plate was scanned and you were billed at each intersection. In addition to being a huge invasion of privacy, the cost to maintain this network (and your cost to use it) would skyrocket. Imagine 911 asking for a credit card number before dispatching police, fire or EMS (Ambulance services already do bill on a per-event basis, but you'd be surprised how few people pay and how little power a county EMS has to enforce collection; without a property tax and Medicaid to cover the difference, EMS service could not be provided in most counties).

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But if you play SimCity, NO MAGIC WATER PUMPS!! If you did, you'd miss the point of taxes =) – MrChrister Dec 3 '12 at 22:59
Yeah, well, SimCity also doesn't allow you to charge your residents independently for the utilities you're paying to provide them, like water/electricity/trash/ambulance; you pay for it with one big tax line item. – KeithS Dec 3 '12 at 23:03

Property taxes, at least in Canada, are levied by the municipality or city in which the property is situated. For many cities, it is a significant source of income.

Part of the justification from the municipal point of view is that the land is serviced, in that it generally has city services like water, sewer, garbage collection and the like. The taxes also commonly pay for city services like libraries, fire and ambulance.

The tax rates vary widely across cities, so where your dream house is located may have a large impact on your overall tax bill.

Property tax is more-or-less a government imposed lien on your house. You can be foreclosed on if you are unable to pay. This is a last resort of course, but can and does happen.

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In almost all cases, city services like water, sewer, garbage collection, etc. are billed separately. However, services like roads, libraries, fire, ambulance, etc. etc. are funded (in part or in full) by property taxes. – ChrisInEdmonton Dec 1 '12 at 0:15
@ChrisInEdmonton - you are right. But just to nitpick, there can be city oversight boards or utility districts that control the private entities providing water, power or garbage service. Governments are as complex as they are varied. – MrChrister Dec 1 '12 at 4:58

Property taxes cover more items than have already been mentioned. As an example, my property tax bill lists the following items: county general purpose, community college, police, police, headquarters, fire prevention, environmental bonds, sewage, town general purpose, highway department, building & zoning, town lighting, park district, garbage disposal, water district, library district, and of course, schools which are now about 60% of the total.

In my area, a $500K home could easily have over $10K in total property taxes. Many of these services are for things that you need or might even want such as parks and libraries. In any case, they must be funded and property taxes are the most prevalent way of doing that.

I was once told that you never actually own property because if you don't pay the property taxes, they will take the property away. By the way, property taxes are not the only expenses that you may have overlooked. You need to have insurance on your house to cover fire, theft, storm damage, and injuries to persons visiting you. In some areas, flood insurance may also be required.

You should also budget for repairs and maintenance. Eventually you will need to replace major items like roofs, appliances and heating/cooling equipment. Don't underestimate the cost of maintaining a lawn if you have one. Basically owning a home is an expensive undertaking and you should have a good understanding of all the expenses involved or you will find yourself in financial trouble.

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You actually own the property. But living inside the boundaries of a municipality has expenses. Sometimes, if you have no liquid assets, they can take anything you have as compensation for taxes not paid. You might lose ownership of your home because a judge takes it from you in exchange for the taxes you owe. – MrChrister Dec 1 '12 at 4:56

Governments only have a few ways to get income: tax income, tax consumption, tax property (cars & boats), tax real estate, or tax services (hotel & meals). The National, state, county, city, and town taxing authorities determine what is taxed and what the rate will be to get enough money to run their share of the government.

In general the taxing of real estate is done by the local government, but the ability to tax real estate is granted to them by the state. In the United States the local government decides, generally through a public hearing, what the rate will be. You can usually determine the current rate and tax value of the home prior to purchase. Though some jurisdictions limit the annual growth of value of the property, and then catch it up when the property is sold. That information is also in public records.

All taxes are used to build roads, pay for public safety, schools, libraries, parks.. the list is very long. Failure to pay the tax will result in a lien on the property, which can result in your losing the property in a tax sale.

Most of the time the bank or mortgage company insists that your monthly payment to them includes the monthly portion of the estimated property tax, and the fire insurance on the property. This is called escrow. This makes sure the money is available when the tax is due. In some places is is paid yearly, on other places every six months. With an escrow account the bank will send the money to the government or insurance company.

Here is the big secret: you have been indirectly paying property tax. The owner of the apartment , townhouse, or home you have been renting has been paying the tax from your monthly payment to them.

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Property taxes are levied by the local authorities to pay for their services. Since the services are continuous - so are the charges. You need someone to pave a road to your house, to build infrastructure, to maintain the police force, fire department, local schools etc. That's what your property taxes are going to.

However, at times the property taxes become more than what the owners have actually paid for the house. Think of a house bought in the midst of a recession at a bargain price of $20K, but at the top of the market bubble costs $2M. The poor guy who bought it for $20K should pay as if he had ever had $2M?

It can certainly be the case that the property taxes change drastically over the years and sometimes people have to give up their property because they cannot afford the taxes. That is exactly the thought that had led Californians to amend the Constitution in Prop 13.

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+1, if I may add here - our town budget has its largest line item the schools. 2/3 of my property tax. There's a movement to offer a discount to old folk below a certain income level to help them not get pushed out of their homes. My neighbor, 4 bedrooms, no kids. It would be better to give them a discount than to have a family with 3 or 4 kids move in. – JoeTaxpayer Dec 1 '12 at 0:24
@Joe I lived in a country where there's no property tax but rather "resident" tax - residents pay based on the size (not value!) of the property they live in (may it be renters or owners). That actually makes more sense to me, because the road to my house won't get any better if I pay another 1M for it, but it will definitely get worse if I have another 10 cars driving on it... – littleadv Dec 1 '12 at 0:27
And while one could debate the efficiency of gov't services, I would rather pay tax and have a fire dept that covers the town than how it could to be where if you don't have the fire company's medallion on your house, they watch it burn.… – MrChrister Dec 1 '12 at 4:49
A $2M house purchased for $20K will be taxed at the low value for years. It takes time to go back to $2M, and when the tax gets to be too much, they can sell and make a ton of profit. Some places limit the increase from one year to the next, so it can take a long time for it to grow 100x. – mhoran_psprep Dec 1 '12 at 15:51
@mhoran_psprep some places do, I explicitly mentioned California. But some don't. My properties in AZ more than doubled their values within 2 years. 20k to 2M may be a bit extreme, but having your tax quadrupling within mere years is definitely not unheard of, in fact - that is exactly what has caused prop 13 in CA. – littleadv Dec 1 '12 at 22:06

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