Property tax exemptions, explained

Quick insights

• Property tax exemptions are intended to promote social welfare by reducing the cost of owning property for certain organizations or individuals.
• Property taxes are assessed on a local basis, including the framework for how exemptions are calculated and which situations qualify for an exemption.
• Those eligible for exemptions generally need to apply with their local tax assessor, including schools, religious groups, charities, those with disabilities, veterans and the elderly.

Property tax exemptions help reduce the cost of owning real estate as a way of promoting social welfare. Often, exemptions are granted to those with disadvantages and organizations working to promote the public good. Property tax exemptions are created and administered by local governments, so the specifics range widely depending on the area.

In this article, we’ll provide a primer on how property tax exemptions may fit into your calculations and identify groups and situations where they may apply.

What are property taxes?

If you already know the basics about property taxes, consider this a refresher. Property taxes, or how much you owe in taxes for the real estate you own, are generally assessed at the local level within a state-provided framework. There is no federal property tax, which means that the laws and regulations which determine how taxes are calculated (and therefore what situations qualify for exemptions) vary by state.

How property taxes are calculated

In general, property taxes are calculated based on the assessed value of your property (how much it’s worth), including both the land and the buildings on it. Local government assessors determine this value, which is then multiplied by the designated tax rate, also known as the mill rate. “Mill” is derived from the Latin word for “thousandth.” In property tax, 1 mill is equal to $1 in property tax levied per $1,000 of assessed value. For example, if your city has a mill rate of 1, and you own a home with an assessed value of $200,000, you will owe $2,000 in property tax.

What is a property tax exemption?

A property tax exemption reduces your property’s assessed value for tax purposes, lowering or eliminating your need to pay property tax. Exemptions are typically granted either to an organization because of its protected status or to an individual based on certain personal characteristics, such as age or disability. As with tax assessments, the rules for property tax exemptions are written and administered at the local level.

Know the difference: Exemptions and deductions

Having a tax-exempt property impacts how much the owner will pay in property taxes. While a “tax deduction” may sound similar, a deduction only applies to income tax calculations, not property tax calculations. In income tax calculations, a tax deduction reduces your total taxable income. However, it’s possible that the amount of property tax you pay might qualify you for an income tax deduction.

Who is exempt from paying property taxes?

Because property tax exemptions are intended to promote social welfare, those who qualify typically include organizations working for the public good and individuals with certain kinds of disadvantages. Eligible groups may include:

• Religious groups: Buildings used regularly or exclusively for religious gatherings (for example, churches, synagogues and mosques) are typically exempt from property taxes.
• Charitable organizations: Property used for charitable purposes may qualify for an exemption from property tax. This could include the headquarters of a nonprofit or community housing.
• Schools: Public schools generally do not pay property tax. Private schools may also be exempt if they meet certain criteria, such as nonprofit status.
• Seniors: Many localities offer property tax relief for seniors, typically for those over a certain age (often over the age of 65). These exemptions may also be based on income criteria.
• Those with disabilities: Individuals with disabilities may qualify for property tax exemptions if they meet certain criteria, typically including proof of disability.
• Veterans: Some areas provide property tax relief for all veterans, while other areas may limit it to certain veterans based on the nature of their service or disability.
• New builds: To promote building development, some areas offer temporary exemptions for owners of newly constructed homes.

How to apply for a property tax exemptions

The application process for property tax exemptions varies by locality. In many places, exemption applications are due before the fiscal year starts. Depending on the type of exemption, you may need to submit documentation confirming your age, disability or veteran status. Once you’ve received an exemption, it may renew automatically every year or last for a few years before you need to reapply. Specifics regarding the application process can be found on your local tax assessor’s website.

In conclusion

Property tax exemptions can help reduce the costs of owning a home for certain individuals and organizations. If you believe you may qualify for an exemption based on your status, begin by checking eligibility criteria and reviewing application steps with your local tax assessor.