Real Estate Tax in the USA

Discussion in 'Chit Chat' started by BMK, Feb 18, 2021.

  1. BMK


    I have moved this discussion from the Options forum.

    In an abstract, theoretical sense, you are sort of renting your own property--from the government. Real estate tax in the USA has its origins in the feudal system of English common law. Nine hundred years ago, all property legally belonged to the king. The king granted you an estate, and you had to give him a portion of the income from that estate each year. The king could take the land back at any time. And if you died, the land would go back to the king, not to your heirs. Or there would be a death tax so onerous that your heirs would have to sell the estate to pay it.

    You might find this interesting:
  2. I still need more time to really grasp it. Like I said on the Options thread, the property tax I pay for a year is in the order of 0.05% of the property value, less than the amount I pay for electricity in a month. Bottom line is if you own a property you still need to worry about food and expenses but "renting your own house from the state" isn't one of them.
  3. BMK


  4. Spooky. So the tax is used by the government to collect money. Governments need money so there must be someway to get them. The fair way to get them is by taxing income, I think.

    But "taxes on income" don't seem so low either in the US. By comparison I'm paying some 35% and I get contradictory figures but some guys I talked to claim they pay even more in parts of the US.

    It seems very wrong to tax property at "rent" level but anywayz, not my problem :D
  5. BMK


    I don't think there is a complete explanation that will make sense. Many people believe that the system is broken, because a major portion of real estate tax in the USA is used to fund local schools. The result is that wealthier areas with more expensive homes have better schools than areas with less expensive real estate.

    In the USA, a substantial majority of homes are purchased with a very low downpayment--often as little as 3% of the purchase price--and a 30-year mortgage loan. Most of these loans are never carried to maturity. The home is often sold after only four or five years. If the homeowner is lucky, the property value has gone up. Even though they have not accumulated much equity, when they sell the house, the loan gets paid off and they have extra money left over... for a downpayment on a new house. And it starts all over again.

    The property taxes are included in the monthly mortgage payment. Most homeowners in the USA don't sit around waiting for a yearly invoice to arrive in June and worry about how they are going to pay it. When they buy the house, the mortgage lender adds a certain amount--roughly 1/12 of the annual property tax--to the monthly mortgage payment. The bank effectively acts as a collection agent for the government. The money is held in an escrow account. The property tax bill is sent to the lender--not the homeowner. And the lender pays the bill.

    When you apply for a mortgage loan, and the lender determines how much you can borrow, the property taxes are included in the calculations. They do the same thing with homeowner's insurance. The monthly mortgage payment includes principal, interest, taxes and insurance.

    All of it is part of the formula that determines whether you can afford the house you want to buy. The general rule of thumb is that your monthly "housing payment" should not be more than about 30% of your income. Some lenders are more flexible and may allow it to be 35% or even 40%.

    But the point is that in the USA, very few people pay cash for their house. Most people get a mortgage loan. And if you can't afford the property taxes, you won't qualify for the loan.

    I'm not saying property taxes in the USA are good, or bad, or fair, or unfair. I'm just explaining how the system works for most people.

  6. ajacobson


    North Shore of Chicago about 3% - mostly goes to the school system. Tax bills are also public.
    The Salt cap was painful as it was designed to be in Blue states,
    Last edited: Feb 18, 2021