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Understanding Property Tax

Everyone who owns property in Michigan is required to pay property taxes. Whether you own a home on that land or whether the land is vacant, you will be assessed property taxes that you have to pay.

Unlike some other taxes you pay, property taxes are not a set amount or set percentage throughout the state, and they are based on how much your property is valued at. While no one likes to pay property taxes, they go to fund some essential services that everyone uses on a day-to-day basis.

Unfortunately, they are often misunderstood. Let's take a more in-depth look at what property taxes are and all that they entail in Michigan.

What Do Property Taxes Pay For?

Property taxes fund some of the most important services that all residents of Michigan use in some fashion every day in their lives. In fact, property taxes are the sole source of money to pay for some of these sources.

On the local level, property taxes fund local municipal governments. This funding pays for services such as trash and recycling collection; police departments, fire departments and other emergency services; road repair and maintenance; recreational services; and salaries for municipal workers.

In addition, a large portion of your property tax bill helps to fund local public school districts. Without this funding, the school districts wouldn't be able to operate properly.

A portion of property taxes also goes to the county government and state government to pay for services that these two entities control. That includes state police services and road maintenance on county and state roads, for instance.

How Are Property Taxes Determined?

One of the biggest reasons why property owners don't like property taxes is that they are completely out of their control. The taxing entity is the one that determines the rate that the taxes will be assessed. In the cases above, that means the local, county and state governments -- and the school districts, to an extent -- have control over how much property owners pay in taxes.

Each of these entities sets an annual budget. Then, based on the needs of the budget, and what's left over in reserve funds, the entities may decide to raise property taxes to pay for the necessary services. 

In other words, the elected officials at the local and state level are the ones who are responsible for setting the property tax rate in Michigan. While property owners can elect the people who will represent them, they have next to no say in the property taxes they must pay that are controlled, in essence, by the people who serve on these entities.

How Are Property Taxes Determined?

Unlike other types of common tax, property taxes vary based on two major factors -- the value and location of your property. This is much different from income tax, which is based on how much you earn, or sales tax, which is a flat rate no matter what you buy.

This is another reason why property owners are often up in arms about property taxes. The property tax rate is the same for all property owners regardless of how much people earn. It is solely based on the value of the property itself.

This can sometimes be an issue for seniors who lose income as they age but are actually required to pay more in property taxes as the value of the property -- and the tax rate -- increase. 

As of 2020, Michigan ranked 13th in the country for having the highest property taxes. The effective real property tax rate in the state at that point was 1.44%. The effective real property tax rate is the amount of taxes that are paid, as a percentage compared to a property's value.

For instance, if your property was assessed at $100,000, you would pay $1,440 in total property taxes based on the 1.44% real effective property tax rate. You can perform this calculation based on your home's actual property value as such:

Property Value X 0.0144

Keep in mind that the formula above is for the average effective real property tax rate for Michigan. You should substitute your tax rate for that number when doing this calculation. The tax rate will vary slightly from one county to the next in Michigan.

How Are Property Taxes Paid?

 

Many people will pay their property taxes as part of their ongoing mortgage payment. This will be part of the escrow account.

In addition to mortgage principal and insurance on the loan itself, you will pay a set amount each month to your escrow account. These funds are used by the lender to pay your property taxes and your home insurance directly to those entities collecting it. 

The escrow amount will build up each month, and the lender will use the funds to pay your property taxes when they are due. The nice part about this is that you won't have to worry about saving up to pay your property taxes.

On an annual basis, the lender might conduct an assessment of your escrow amount based on the projected property tax bill. If the lender decides your escrow account would be short any amount for the upcoming year, they may increase your overall mortgage payment to compensate.

Can You Pay Property Taxes Directly?

In Michigan, you have the option of paying your property taxes directly to your local taxing entity. Some mortgage companies will require you to pay through escrow for the first year that you own the home. After that period, you can often request the lender to stop collecting this money in escrow, which would allow you to pay your property taxes directly.

If you decide to go this route, you would be responsible for ensuring that you pay the full amount you owe on time to the appropriate taxing entity. Property taxes in Michigan are generally due twice a year -- in July and again in December. 

Should you decide to pay directly, you will receive a bill directly from the taxing entity, and all questions and concerns you have should be directed to them. 

 

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