What are property taxes and how much should I expect to pay?

When you buy and own a home, your local government (typically through what is called a County Tax Collector's office) sends you an annual or semi-annual, lump-sum bill for property taxes. Receiving this bill and paying it are never much fun because most communities bill you just once or twice per year. Property taxes are typically based on the value of a property. Although an average property tax rate is about 1.5 percent of the purchase price of the property per year, you should understand what the exact rate is in your area. You can call the Tax Collector's office in the town where you're contemplating buying a home and ask what the property tax rate is and what additional fees and assessments may apply. The current owner's taxes may very well be based upon an outdated and much lower property valuation. Real estate listings may contain information as to what the current property owner is paying in taxes. Your property taxes (if you buy the home) will probably be recalculated based upon the price you paid for the property. If you make a small down payment (typically defined as less than 20 percent of the purchase price), many lenders insist upon property tax and insurance impound accounts. These accounts require you to pay your property taxes and insurance to the lender each month along with your mortgage payment.

Are mortgage interest and property taxes allowable deductions on my income tax return?

One of the treasures of homeownership is that the IRS and most state governments allow you to deduct, within certain limits, mortgage interest and property taxes when you file your annual income tax return. When you file your Federal IRS Form 1040, the mortgage interest and property taxes on your home are itemized deductions. On mortgage loans now taken out, you may deduct the interest on the first $1,000,000 of debt as well as all of the property taxes. The good folks at the IRS also allow you to deduct the interest costs on a home equity loan (second mortgage) to a maximum of $100,000 borrowed. Just because mortgage interest and property taxes are allowable deductions on your income tax return does not mean that the government is literally paying for these items for you. Consider that, when you earn a dollar of income and must pay income tax on that dollar, you don't pay the entire dollar back to the government in taxes. The amount of taxes you pay on that dollar is determined by your tax bracket.