Real Estate Taxes vs Property Taxes: What’s the Difference?

It’s a fact of life that taxes and property are inseparable. People often mix up ‘real estate taxes’ and ‘property taxes,’ but they’re not exactly the same thing.

Understanding the distinction between real estate taxes vs. property taxes is vital for property owners. It impacts:

• How taxes are calculated
• Who levies them
• What assets are taxed

This guide breaks down the differences between real estate and property taxes, helping you navigate their complexities and implications.

What are real estate taxes?

Real estate taxes, often referred to as “real property taxes,” are levied on immovable property, including land and any permanent structures or fixtures attached to it.

Local governments typically assess these taxes, which are a primary source of revenue for funding essential services.

What is considered real estate?

“Real estate” encompasses immovable assets such as:

• Land
• Houses
• Commercial buildings
• Permanent fixtures, like fences or driveways

How are real estate taxes calculated?

Real estate taxes are based on the property’s assessed value, which local tax assessors determine.

The tax amount is calculated using this formula:

Assessed Value × Local Tax Rate = Annual Real Estate Tax

For example, if a property is valued at $400,000 and the local tax rate is 1.2% (or 12 mills), the annual real estate tax would be:

$400,000 × 0.012 = $4,800

Tax rates—often referred to as mill rates—vary by jurisdiction. They’re typically expressed as a percentage or per-thousand-dollar value of the assessed property.

What are real estate taxes used for?

Local governments use real estate taxes to fund essential services, such as:

• Public schools
• Police and fire departments
• Road maintenance
• Local infrastructure improvements

This makes real estate taxes a central component of community development and public welfare.

What are property taxes?

Property taxes encompass a broader category of taxable assets, including real estate taxes and taxes on personal property.

While real estate taxes are limited to immovable assets, property taxes apply to movable assets, often called personal property.

What is considered personal property?

Personal property includes movable items such as:

• Vehicles (cars, motorcycles, trucks)
• Boats and recreational vehicles
• Mobile homes (if the owner does not own the land)
• Industrial equipment
• Farm machinery

Personal property taxation varies significantly between states and local jurisdictions. Some states impose taxes on specific assets, while others do not tax personal property at all.

How are property taxes calculated?

Property taxes on personal property are calculated similarly to real estate taxes:

Assessed Value × Tax Rate = Tax Amount

For instance, if you own a vehicle valued at $25,000 in a jurisdiction with a personal property tax rate of 1.5%, the annual tax would be:

$25,000 × 0.015 = $375

Remember that not all jurisdictions levy taxes on personal property, and tax rates and assessment methods can vary widely.

What are property taxes used for?

Like real estate taxes, property taxes contribute to local government revenues, funding public services and infrastructure.

Specific taxes on personal property may fund targeted programs, such as local road maintenance or public transit.

Key differences between real estate taxes vs property taxes

Although real estate taxes are a subset of property taxes, there are important distinctions between the two.

Here’s a breakdown of the key differences:

Payment and deduction considerations

Both real estate and property taxes have implications for payment timelines and potential tax deductions.

Payment schedules

Real estate and personal property taxes are generally assessed annually or semi-annually.

Payment deadlines and methods vary by location, but most local governments send property tax bills to owners, outlining the due amount and payment options.

Tax deductions

Real estate and personal property taxes are often deducted from federal income tax returns.

However, the Tax Cuts and Jobs Act of 2017 capped the total state and local tax (SALT) deduction, which includes property taxes, at $10,000 per year (or half that amount for married individuals filing separately).

This cap has reduced the tax benefit for property owners in high-tax states, but it’s still an important consideration for financial planning.

State-by-state variations in property taxation

Property taxation varies significantly across the United States. For instance:

• High-tax states: New Jersey has one of the highest property tax rates, with an average effective rate of 2.08% as of 2022.
• Low-tax states: Hawaii boasts the lowest average effective property tax rate, at just 0.26%.
• Personal property taxes: Some states, like California, do not impose personal property taxes on vehicles, while others, like Virginia, have significant personal property tax obligations.

These variations highlight the importance of knowing the specific tax laws in your jurisdiction.

Property taxes vs real estate taxes: Why the distinction matters

Part of being an effective property owner means having, at least, a general knowledge of the tax system.

If you can create an insightful tax strategy, it will be instrumental in how your taxes are assessed, the total amount you’ll owe, and your potential deductions.

For example:

• You’ll receive separate tax bills if you own both real estate and a taxable vehicle.
• Real estate taxes tend to have higher rates and broader implications for local government funding than personal property taxes.

Being informed about these distinctions helps avoid confusion and ensures you comply with local tax laws.

Real estate vs property taxes: The wrap-up

Real estate and property taxes are integral components of property ownership, but they are not the same.

Real estate taxes apply exclusively to immovable property like land and buildings, while property taxes encompass a wider range of taxable assets, including personal property like vehicles and boats.

Understanding these differences allows property owners to navigate their tax responsibilities better, optimize potential deductions, and plan for future obligations.

Park Place Finance gets you started on the road to wealth

If you’re ready to get started on your investing future, Park Place Finance can offer you some of the best market rates and loan terms to finance your purchase. Call us today at (866) 407-1599.