It’s a common misconception that property tax and real estate tax are interchangeable terms, but that’s not entirely accurate. The confusion often arises due to the term ‘property tax’ being used for both real estate and personal property tax.
So what is real estate tax exactly?
This is an annual levy homeowners must pay based on the assessed value of their home. To arrive at this figure, the market value of your home is first determined. The local county then applies a predetermined percentage to the market value; this provides the tax assessment value.
The amount of real estate tax owed by a homeowner is contingent on the home’s worth and the particular region of the country in which they reside. To arrive at the final sum, the county calculates the tax assessment value by multiplying it by the local tax rate, which is also a percentage. For example, if your house’s market value is $250,000 and the predetermined rate is 70%, the tax assessment value of your home becomes $175,000. If the local tax rate is 3%, your yearly real estate tax will be $5,250.
What then, is property tax?
The term ‘property tax’ notably covers both real and personal property. Real property refers to land and permanent structures like your home, taxed as real estate. As such, it is a cause of confusion when people use the terms real estate tax and property tax interchangeably.
In addition to real property, the term property tax also pertains to personal property – items that aren’t permanent or fixed, such as your car, which incurs a personal property tax during the annual registration process. Office furniture and equipment are also subjected to personal property tax as they can be moved around easily.
One particular example to note is with mobile homes; because they can be relocated without inflicting damage, they are subject to personal property tax.
The precise definition of personal property and the amount you must pay on it, varies depending on your resident state. The fundamental difference between real estate tax and property tax is of significance, given factors including tax rates and deductibility on income tax.
While the terms real estate tax and property tax are often, incorrectly, used interchangeably, property tax accounts for both real property—land and structures—and personal property, which includes vehicles, furniture, business assets, and even stocks and bonds.
