Unless you own a hospital, you’ll probably have to pay property taxes as a homeowner. Property taxes are periodic payments to your local governments used to fund public services like education, transportation, parks, libraries, and emergency services. They make up a large portion of your state and local government’s income and are essential to a well-functioning region. Not only do property taxes vary between states, but they also vary by county. Property taxes are something that luxury homeowners need to consider when deciding on a location.
How Property Taxes Work
Each area has some mill levy, which represents how much property taxes you pay each year per $1,000 of assessed property value. Each of these dollars is called “one mill”. For example, the mill levy in California is 7.4$ or 7.4 mills, so on a $300,000 home, you would pay $2,220 in property taxes. Your area’s mill levy heavily depends on your local government and changes regularly. Generally, local governments will determine their annual budget and find the amount of property taxes required to raise enough money to fund public services. Since you are charged a percentage of your home value in property taxes, you pay an amount proportional to your local government’s budget. This means that if your county has more infrastructure or better public services, you’ll likely have to pay a higher mill levy.
You should also pay attention to your assessed property value. This value is determined by the surrounding real estate market and it is assigned to you by your local tax municipality. There are many cases where your assessed property value is too high and for luxury homes, this could severely increase your property tax bill. It’s important to regularly check your assessed property value to ensure you are paying a fair amount. You can find this information on the Public Records Online Directory and use it to request a re-evaluation if you think it is too high.
Luxury Homes
If you try to picture a luxury home right now, you’d probably think of a mansion with 10 bedrooms, but luxury homes to tax officials come down to the numbers. In real estate, a luxury home is usually easily identifiable by the mortgage used to obtain it, the jumbo loan. Jumbo loans are mortgages with principal amounts too large for conventional FHFA loan limits. With this kind of mortgage, you can expect stricter eligibility requirements and higher mortgage rates. You’ll also probably have to make a 20% down payment. Jumbo loans are one way of defining “luxury homes”.
However, for property tax purposes, the FHFA has no impact on your mill levy or assessed property value. In fact, your mill levy does not vary based on your home price. Instead, some states set limits for regular homes and charge a higher transfer tax on homes above that value threshold. This is known as a graduated rate structure or “mansion tax”, and is designed to charge higher taxes to wealthier households on real estate transactions. If this sounds familiar, it’s probably because most states charge income taxes in a similar fashion, known as a progressive tax. With your income taxes, your income tax rate rises as your income rises, but with your transfer tax, it’s all relative to your home value. While the graduated rate structure for transfer taxes hasn’t been implemented in all states, some states and municipalities have begun adding them. Currently, 7 states charge some form of a mansion tax.
- Connecticut
- The District of Columbia
- Hawaii
- New Jersey
- New York
- Vermont
- Washington
This means that your property tax rate or mill levy doesn’t vary as your home gets more expensive. However, your property tax directly increases relative to your home price because it is a flat percentage of the assessed property value.
What It All Means
Fortunately, you do not have to consider your home price when looking at property taxes. No matter where you live, property taxes will be there, but there are things you can do to reduce them. It’s important to know that while property taxes don’t vary by home price, they heavily vary by state and even between counties. As your home gets more expensive and you start considering luxury homes, small differences in property taxes could result in thousands of dollars lost throughout a mortgage. The fact is property taxes matter more to luxury homeowners and they need to have a serious role in your next real estate decision.
