Taxes are, as you know, one of those two irksome but inevitable things in life. And included among the inevitable taxes are property taxes. It’s just that with these taxes, many of us don’t know as much about them as we should or could. For example, how are property taxes calculated, who pays them in a real estate transaction, and how can you lower them? Find out what you need to know about property taxes in this guide for Chicago buyers and sellers.
Property Tax Overview
Property taxes are taxes “on real estate and some other types of property. Local governments typically assess property tax, and the property owner pays the tax. The property tax is usually based on the property location and how much it’s worth.” Property taxes typically go to the local government/ municipality to fund infrastructure and basic necessary services such as road construction/maintenance, schools, police and fire departments, and so on.
And you have to pay this tax. “Failing to pay your property taxes can result in the taxing authority placing a tax lien on the property. A tax lien is a legal claim against property or financial assets you own or may have coming to you. It’s not a seizure of your assets, but it is a claim on them. If you sell the asset, the government could be entitled to some or all of the proceeds.”
How Your Property Tax is Calculated
In theory, the way your property taxes in Chicago are calculated is pretty straightforward, but it can get rather complicated in actual practice. The basic formula for calculation involves “multiplying the value of the property by a tax rate: Property tax = value of the property x tax rate.”
The complications arise when it comes to the actual factors and components that really determine your tax bill . . .
Property Value
- The assessed value is typically less than the market value, and the difference varies according to location.
- “Cars, machinery, and other property might be subject to personal property tax.”
Tax Rate
- “Real estate tax rates are often based on the “millage rate,” where one mill is equal to one-thousandth of a dollar. Your tax rate might not be expressed as a percentage, but rather as some number of mills.”
- “Some taxing authorities apply the tax rate only to a portion of the home value rather than to the full home value. That can reduce the bill.”
- “The local taxing authority, again likely your county but possibly your city or town instead, typically determines the tax rate.”
Who Pays the Property Taxes
Now let’s see who pays the property taxes in a real estate transaction in Chicago. It typically goes like this . . .
When the seller has already paid all the taxes for the year, the buyer will have to reimburse the seller for the prorated portion of the taxes. But it the taxes haven’t been paid, “the seller should be charged his or her prorated share with the amount placed in escrow.”
“This is, in fact, how real estate tax payments are usually arranged when you buy or sell a home. The home sale contract should clearly set forth these requirements–requiring each party to pay his or her pro rata share of the tax.”
Who Can Take the Tax Deduction
When a buyer files her taxes for the year, she can deduct the property taxes she paid as an itemized deduction. In fact, “the IRS automatically treats the seller as having paid the property taxes up to the date of sale, and the buyer having paid the taxes due after the date of sale.”
Here’s an illustrative example . . .
“Bill purchases a home from Sandra with a September 1 closing date. The real estate tax year in the area was the calendar year. The real estate tax due for the year was $900 and was paid by Sandra on August 1. The sales contract Bill and Sandra sign should pro-rate payment of these taxes based on the number of days each owns the house during the year of sale. Bill will own the property for 122 days, which amounts to 33% of the year (366 days in a year ÷ 122 days = .3333). Bill should reimburse Sandra for 33% of the $900 property tax she paid – that is, Bill should pay $300.”
How to Lower Your Property Taxes
If you think your property taxes are too high, you actually do have some recourse. Consider that an estimated 30% to 60% of properties across the country are over-assessed, so there’s a good chance you may be paying too much. If you think that’s the case, you need to appeal the assessed value.
You can also lower your tax bill by taking advantage of certain programs offering tax deductions and exemptions for . . .
- Seniors
- Veterans and surviving spouses
- Disabled people
- Those who own agricultural land
In addition, “most states offer homestead tax breaks that exempt part of your home’s value from property taxes.”
Where to Learn More . . .
The matter of property tax, then, can get pretty involved and complex, especially for buyers and sellers. But a good Chicago agent can help you successfully navigate this tricky area. If you’re a buyer or seller in Chicago and are concerned about property taxes, just contact us at 773.233.2301.