I love taxes! Said no one . . . ever. Paying taxes is like taking a trip to the dentist—it’s part of life, but not a fun part. Property taxes are no exception.
If you’ve owned a house for a few years, you know property taxes are part of the deal. But it’s easy for new home buyers to ignore how property taxes can affect their budget during all the excitement of buying a house. (Garden or pool? Country or city? Shutters or blinds? Quarterly or annual tax installments? One of these things is not like the other.)
Even if you remember to factor in these pesky little payments, you’ve probably got some questions about them: How are property taxes paid? How often do you pay property taxes? When do you pay them? And are property taxes included in your mortgage payment?
Let’s cut through the confusion about property taxes so you don’t make a mistake that could cost you hundreds—or even thousands—of dollars.
Property taxes are a yearly fee that local governments collect for public services in the community. A good chunk of the money collected from property taxes goes to your local police and fire departments, schools and road maintenance. So when your local government (finally) sends someone to fix that pothole in your neighborhood, it could be your property tax dollars at work!
Okay, okay . . . I know. All you Ron Swansons out there are probably scoffing at that last part, but that doesn’t make it any less true. They may not always spend tax dollars efficiently, but regardless, they need your money.
Lots of people use “property tax” and “real estate tax” to mean the same thing . . . like how drinking fountains are called bubblers in Wisconsin and Massachusetts (which, admittedly, is a lot more fun to say).
But are they the same? Well, yes and no. Real estate taxes are a specific type of property tax. Believe it or not, some states and counties do charge taxes for tangible personal property (TPP) like vehicles and furniture. Now don’t go thinking that your local government is going to start looking in your house to see how many couches you own. This kind of tax is usually just for businesses and business property.
So when I say “property taxes” in this article, know that I’m talking about real estate taxes.
Is the sky blue? Yes, everyone who owns property has to pay property taxes. That includes homeowners. And if you own other types of property (like farmland you inherited from your parents or an investment property), you’ll pay property taxes on those too.
But if you’re renting someplace, like an apartment or an office space, you don’t have to worry about property taxes. That’s on your landlord.
Property tax is included in most mortgage payments (along with the principal, interest and homeowners insurance). So if you make your monthly mortgage payments on time, then you’re probably already paying your property taxes. Isn’t that convenient?
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Here’s how you pay property taxes as part of your mortgage payment:
Let’s say Jim and Pam decide to buy a home, and their mortgage lender estimates they’ll owe $1,600 in property taxes each year.
Instead of letting Jim and Pam get smacked with a huge tax bill at the end of the year (because no one wants to get blindsided like that), their lender will divide their total property tax amount by 12 months. Then they’ll charge Jim and Pam that amount of their property taxes as part of their mortgage payment each month. Let’s look at the math:
$1,600 / 12 months = $133 per month
The lender sets that $133 a month aside in a separate account (usually called an escrow account) and uses it to pay property taxes to the local government when they’re due.
Here’s an important callout: The mortgage lender gives you estimates of what you owe in property tax. If that estimate is off, you might get a refund, or you might have to pay a little extra. Be prepared for either scenario!
Don’t have a mortgage? How you pay property taxes will be a little different.
There’s nothing more freeing than making your final mortgage payment, walking out to the backyard of your completely paid-off home, and feeling the grass beneath your feet. It just feels different.
No more monthly house payments for you! But does that mean you’re also finished with property taxes?
I hate to be the bearer of bad news, but you have to pay property taxes forever. (Okay, not forever. But for as long as you own the property. Even after it’s paid for.) Benjamin Franklin was spot on when he said that nothing is certain except death and taxes. Amen, Ben.
The difference is how and when you pay your property taxes.
Once you pay off your house, your property taxes aren’t included in your mortgage anymore, because, voila! You don’t have one. Now it’s on you to pay property taxes directly to your local government. No more middleman between you and the tax collector.
How often you pay property taxes depends on where you live. Your local government may want your property taxes paid in one lump sum a year or broken into smaller payments that are spaced a few months apart.
The exact day your property taxes are due also depends on where you live, so pay attention to the due date on your property tax bill when it arrives in the mail. This means you have to check your mail (or email if you’re extra nerdy and signed up for tax notifications like me). Since my wife and I paid off our house, we’re in this boat. (And you bet your bottom tax dollar that I’ve marked my calendar for February 29, when our property taxes are due!)
And don’t think you can just skip a payment here and there, either. If you get behind on your property taxes or you don’t pay them at all, the local government can put a lien on your house to make you pay your taxes when you sell it, or they can even take your house and sell it to recoup the tax debt you owe them . . . even though your house is completely paid for. Yikes. Don’t ever let it come to that.
The best way to handle property taxes on your own is to plan ahead.
First, calculate what you’ll owe for each property tax bill and divide it by the number of months between bills. So, if you owe property taxes once a year, divide the amount you owe by 12 months. If you pay twice a year, you’ll divide the amount you owe by six months. And so on.
Then set that money aside in a sinking fund each month. That way, you won’t have to dig under the sofa, or worse, sell your sofa on Facebook Marketplace to scrape up the money to pay those taxes when they’re due.
