U.S. property taxes, which help fund roads, schools, emergency medical services, and other services, are a vital source of revenue for state and local governments.
Property tax rates vary greatly among states and localities and can have a major impact on business investments and where people decide to live. Accountants who help clients effectively manage property taxes can further strengthen their role as a trusted advisor.
As a significant source of state and local revenue in the United States, the importance of property taxes is not to be underestimated. In fact, property taxes account for more than 30 percent of total state and local collections, and more than 70 percent of total local tax collections.
Taxpayers are probably most familiar with residential property taxes on property such as residential or commercial land and structures, which is referred to as real property taxes. However, many states also tax tangible personal property (TPP) owned by businesses and individuals like business equipment and vehicles.
Let’s further unravel the complexities and types of property tax by beginning with commonly asked questions.
Table of contents:
- What is property tax?
- Real estate property tax
- State differences in property taxes
- How are property taxes calculated?
- Property tax case study
- How do you find tax information on a property?
- Property tax software
What is property tax?
Property tax is tax levied on immovable property or “real property” like residential or commercial land and structures, as well as on “personal property” like business equipment and noncommercial motor vehicles.
In all 50 states and the District of Columbia jurisdictions impose property taxes. Much of the property tax revenue stems from local levies (school districts, counties, etc.) on land and improvements made on that land; however, some states also tax personal property like automobiles and machinery.
What is personal property tax?
Many states impose property taxes on tangible personal property (TPP), which is moveable property like automobiles, business equipment, and machinery. This is in addition to the property taxes applied to “real property” like land and structures.
As of 2019, 43 states included TPP in their property tax base.
Taxes on TPP are regulated at the state level but are levied primarily by local governments, and how TPP is taxed varies. Assessment ratios, property classifications, and exemptions are usually established by the state. Localities then opt to tax TPP within those boundaries established by the state.
What is a business personal property tax?
Tangible personal property is owned by individuals and businesses. TPP is the same as business personal property. For businesses, TPP covers most products and goods that are owned by a business and are not physically attached to a location. In other words, they are movable items. In the case of a business, TPP may include:
- Machinery
- Tools
- Business equipment like cash registers
- Inventory
- Computers, printers, and scanners
- Business vehicles
There are seven states that exempt all TPP from taxation. These states are:
- Delaware
- Hawaii
- Illinois
- Iowa
- New York
- Ohio
- Pennsylvania
Another five states exempt most TPP from taxation except for select industries that are centrally assessed, such as oil and natural gas refineries or public. These states are:
- Minnesota
- New Hampshire
- New Jersey
- North Dakota
- South Dakota
Furthermore, certain types of business personal property, such as leasehold improvements and supplies, may be exempt from taxation in some jurisdictions. Most states do not tax intangibles (assets that have no physical form but hold value), like licenses or trademarks.
Real estate property tax
Real estate property tax falls under the umbrella of property tax. It refers to the tax levied on immovable property or “real property” like residential or commercial land and structures. It does not cover tangible personal property like cars or boats.
Can you capitalize real estate taxes on investment property?
If a taxpayer owns vacant or unimproved land as an investment, there is an election under Internal Revenue Code Section 266 to capitalize expenses including property taxes. The election is made on a year-by-year basis.
The 266 election is only available for vacant or unimproved property in the years where there is no income generated by the property.
So, rather than deducting the costs associated with the land during the tax year, the taxpayer is adding those expenses to the cost of the property. When the property is sold this lowers the capital gain.
State differences in property taxes
Property taxes vary from state to state, and some states are more reliant on property tax revenue than others.
Consider the taxation of TPP, more specifically the taxation of inventory. Fourteen states levy TPP taxes on inventory in some form. For example, in Georgia, inventory is exempt from state property taxes, but localities may tax inventory. In Michigan, inventory is exempt from property tax, except for inventory under lease.
There’s also the taxation of machinery and equipment. Thirty-six states levy TPP taxes on machinery and equipment. And often, agricultural machinery and equipment will be granted lower assessment ratios or millage rates compared to other forms of TPP.
As it relates to real property tax rates, they differ widely both across and within states. And local governments use different methods to calculate their real property tax bases and assessment levels. Furthermore, some jurisdictions impose their tax on the entire assessed value of the property while others tax only a fraction of the assessed value. For instance, the District of Columbia taxes 100% of a property’s assessed value. Meanwhile, South Carolina counties impose tax on only 4% of an owner-occupied property’s assessed value.
How are property taxes calculated?
Calculating property taxes vary by state and county. In short, property tax liabilities are determined by multiplying the property’s assessed value by the mill rate (also known as the tax rate).
For instance, when calculating real property taxes, the first step is determining the property’s assessed value, which may be done through an appraisal ordered by the local government. Some localities may use the market value versus an appraised value. In either case, localities take a percentage of the value to determine the assessed value.
For example, if a home’s market value is $400,000 and the local government taxes 50% of the value, taxes would be paid on $200,000 versus $400,000. That is the assessed value.
It should be noted that some local jurisdictions may impose different tax rates for different types of property, such as business property and residential property. And some states impose a statewide limit on the maximum rate.
To lower a real property’s taxable value or the taxpayer’s payment, some states and local governments may use deductions, credits, exemptions, and limits. Examples include:
- Exemptions for disabled homeowners
- Senior citizen exemptions
- Exemptions for property that is a religious institution
- Assessment limits, which prevent a property’s assessed value from increasing by more than a fixed percentage between assessments
Then apply the municipality’s millage rate (also known as a tax rate). A mill rate is a tax paid per $1,000 of the home’s value. The property tax liability is the property’s assessed value multiplied by the mill rate.
For example, if a municipality’s mill rate is 9.5 and the property’s assessed value is $300,000, the calculation is:
9.5/1000 = $0.0095
$300,000 x $0.0095 = $2,850 owed in taxes per year.
When are property taxes due?
The due dates for real estate and personal property taxes vary by state. Furthermore, within some states due dates are set by each municipality. In general, due dates typically fall in spring and autumn.
Are property taxes deductible?
Property taxes are generally deductible. State and local real estate taxes, and state and local personal property taxes are among the four types of deductible nonbusiness taxes.
According to the IRS, to be deductible, the client must be the owner of the property and paid the tax during the tax year. Nonbusiness taxes can only be claimed as an itemized deduction on Schedule A (Form 1040), Itemized Deductions.
For real estate and personal property taxes paid on property used in a business, they are deducted on Schedule C (Form 1040) or Schedule F (Form 1040). Taxes on property that produces rent or royalty income are deducted on Schedule E (Form 1040).
Non-deductible real estate-related items
In general, payments for the following items are not deductible as real estate taxes:
- Taxes charged for local benefits and improvements tending to increase the value of the property.
- Itemized charges for services like garbage pickup fees.
- Transfer taxes and similar taxes and charges on the sale of a personal home.
- Rent increases due to higher real estate taxes.
- Homeowners’ association charges.
- Foreign real property or personal taxes.
Personal property taxes
As outlined by the IRS, personal property tax is deductible if it is a state or local tax that is:
- Charged on personal property;
- Based only on the value of the personal property like a boat or a car; and
- Charged on a yearly basis, even if it is collected more or less than once a year.
If the tax is partly based on value and partly based on other criteria, it may qualify in part. To illustrate this point, consider the following example:
The state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. The client paid $32 based on the value ($1,500) and weight (3,400 lbs.) of their car. They can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. The remaining $17 ($0.50 × 34), based on the weight, is not deductible.
There is a cap on the deduction limit. As an individual, the deduction of state and local income, sales, and property taxes is limited to a combined total deduction of $10,000 ($5,000 if married filing separately).
Property tax case study
A recent move by the Kansas Supreme Court could potentially have significant implications for taxation in Kansas. At the heart of the issue is how retail stores should be considered for property tax purposes.
In the property tax dispute, the Kansas Supreme Court rejected arguments from big box retailers Walmart and Sam’s Club that a Kansas county had overvalued their stores for property tax purposes.
The decision by the state’s highest court reversed a previous 2021 ruling in favor of Walmart’s argument that its properties in Johnson County were overtaxed by tens of millions of dollars.
Municipalities have tried to appraise properties as if they were occupied and generating revenue, with the valuation tied into a building’s lease.
Retailers, however, have pushed back. Retailers have argued the store should be valued as if it were vacant, with the appraisal reflecting how much a property would sell for if sold on the open market without a tenant.
Walmart initially sought intervention by the state board of Tax Appeals (BOTA) after receiving Johnson County’s appraised value of 11 properties (nine Walmart and two Sam’s Club stores). BOTA lowered valuations of each property and ordered Johnson County to refund overpayments for the 2016 and 2017 tax years.
Johnson County then appealed to the state Court of Appeals. The divided Court of Appeals, however, determined BOTA appropriately adhered to Kansas law. The case then went to the state Supreme Court.
The state Supreme Court issued an opinion instructing BOTA to reconsider the case by fully reviewing the county’s evidence on property appraisals, versus relying on past court rulings (i.e., a 2012 state Court of Appeals decision) to guide its decision.
“Though BOTA may reach the same result on remand, that decision must be based on its own determinations of the facts and witness credibility,” Justice Dan Biles said in the ruling.
Commenting on the ruling, Johnson County Board of County Commissioners Chairman Ed Eilert issued a statement that read: “A Kansas Supreme Court decision on the valuation of big box retailers is critical for local governments across the state of Kansas. This case has been about equity for taxpayers. Every property owner in Kansas, from the large retailer to the homeowner, should be treated equally as the Kansas Constitution requires. Equity is an important factor in property appraisal.”
How do you find tax information on a property?
Aside from a client’s own property tax documentation, tax information on property can also be found by contacting, online or via the phone, the assessor or collector for the desired tax jurisdiction. There are also property tax information aggregators or tax district databases that can prove helpful. However, a more effective approach is to implement a complete property tax solution.
It can be inefficient and time consuming, especially for businesses with multi-location entities, to track down each tax jurisdiction for tax information and requirements. It also increases the risk of manual errors.
Property taxes are a major area of tax exposure and risk. Manual errors, not to mention administrative costs and cash mismanagement, can all impact the bottom line.
Leveraging a property tax solution that features location-based technology streamlines the mapping of assets and provides easy access to critical detailed and summarized reports.
Property tax software
Implementing an end-to-end property tax software solution for managing personal and real estate property taxes can help firms better serve clients and strengthen their role as a trusted advisor. This means implementing a software suite that includes personal property tax, real estate property tax, and property tax workflow.
With ONESOURCE Personal Property Tax, there is no need to manually track asset movement from year to year. Users simply import and classify the assets and let ONESOURCE Personal Property Tax do the rest for returns that are ready to be printed and filed.
There’s also ONESOURCE Real Estate Property Tax software. This can help firms ensure clients comply with all taxing jurisdictions in the United States and Canada, from time-sensitive and widely varying regulations to appeal deadlines and tax bill due dates. Its location-based technology streamlines the mapping of assets and provides easy access to critical detailed and summarized reports.
And with the ONESOURCE Property Tax Workflow Center, firms can help their clients get ahead and stay ahead of property tax management. Users can manage workflow more efficiently, gain control, and get more visibility into what’s working and what’s not.
This end-to-end solution streamlines the entire property tax process — from data management, to forms and filing, to understanding and planning for jurisdictional requirements.
