You already pay taxes when you make money. You pay taxes when you spend money. And you even have to pay taxes when you sin (as if it's more of a sin for me to drink a beer than for the government to steal my money)! Now that you've bought a house, you're going to have pay even more taxes. So how do property taxes work? When are they due? And how do you make sure they get paid?
How are property taxes determined?
There are three parts to the property tax equation, so let's take a look at these one at a time.
1. Government Budgeted Revenue
It is first important to understand that property taxes are usually the largest source of revenue for local governments (we're talking cities and counties). Every year, the City of Charlotte and Mecklenburg County vote to approve their respective budgets. They then use their approved budgets to determine the amount of revenue (money collected) that they anticipate getting from each source. This allows both the city and county to determine how much property tax revenue that they will need in order to fund their budgets. (Can you imagine if you were just able to decide how much your lifestyle cost each year and then demand that your boss pay you that exact amount?!)
2. Assessed Property Value
Great. We know that the city and county use their budgets to determine how much property tax revenue that they need each year...but that still doesn't tell you how your individual property taxes are determined. Well, now we must look at your property's assessed value. North Carolina law requires counties to evaluate all of the property within their jurisdiction at least every 8 years. This essentially means that every 8 years the county assessor's office determines what they deem to be each property's value. This valuation becomes what is known as the property's assessed tax value.
This assessed tax value has absolutely no impact on the market value of your house, and can be higher or lower than your property's actual market value (the amount of money that you could sell it for). Although generally speaking, the tax value should not be grossly out of line with the actual market value of your property. Think about it, if the tax value was last reassessed 7 years ago, it is probably going to be significantly under the current market value of the property.
3. Tax Rate
Okay, so now we have two parts of an equation: The total assessed value of all properties and The total amount of revenue the municipality needs to meet their budget. The City of Charlotte and Mecklenburg County use these two pieces of information to determine the appropriate tax rate for a given year. Each governing body sets their own unique tax rate based on the amount of revenue that they need to raise in order to meet their budget. This rate is essentially a percentage of the property's value that you are required to pay each year in the form of a tax.
In 2018 the tax rate for the City of Charlotte was .4887 while the rate for Mecklenburg County was .8232. To calculate your property taxes for the year you divide your assessed property value by 100 and multiply it by the rate. Let's look at an example:
Say your property value was assessed at $200,000. You would calculate your taxes by first dividing the property value by 100 (200,000/100=2,000). Then you would take this number and multiple it by the tax rate. Charlotte taxes would be $977.40 (2,000 x .4887) and your Mecklenburg County taxes would be $1,646.40 (2,000 x .8232). Adding these together would make your total tax bill for the year: $2,623.80.
When are your property taxes due?
Knowing how much you have to pay in property tax is nice (sarcasm), but you also need to know when they are due. Since we know that your property taxes are based on the budget of the appropriate governing bodies, your tax bill cannot be known/due until after the budget has been approved. This usually occurs during July, and your tax bill usually comes out sometime afterwards.
Technically speaking, your tax bill is due on September 1st of each year. With that being said, you have until the end of the calendar year (December 31st) before your tax payment is considered late. Usually, there is some small incentive to pay your bill earlier (maybe $20 on the total amount owed).
How do you pay your property tax?
Now that you know how your taxes are determined and when they are due, you want to know how to pay them. Well, good news for you! You typically do not have to worry about getting these taxes over to the correct government departments if you are a first time home buyer. That's because most lender's require you to pay them a specific amount each month that they hold onto until your tax bill comes out, and then they pay it for you.
This process is called escrowing your taxes. The reason that the lender requires you to pay these taxes as part of your monthly payment (in addition to your principle and interest payments) is because if you do not pay your taxes, the government can put a lien on your property. A lien essentially gives another party rights to your property for lack of payment. And the government's lien comes in before the lender's lien! If you pay your taxes, and your mortgage, you don't need to know all the details about liens.
You may be wondering: "How do you pay a little bit each month for taxes if you don't know what they will be until July?" Great question. The answer is the lender bases the amount that you pay on the prior year's tax bill. Since the tax rates do not change drastically from year to year, this is a relatively safe option for the lender. Keep in mind that it is possible for you to pay either too much or too little to cover your taxes in a given year. If this happens, the lender may change the amount of money that you pay into escrow each month to cover your taxes. Don't worry, they will send you a notification if this is going to happen.
So, there you have it! Property taxes in a nutshell!