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Property Tax Basics for the Real Estate License Exam

The Real Estate License Exam will have basic questions about property taxes. Think about it logically. This morning you probably drove your car on a street to get to work, right? Presumably, you drove your car.

And if you’re reading this during a school year, your kids probably went to school this morning. Now think about where your water comes from and where your sewage goes. Who put out the fire down the street? You expect the government to provide these services and facilities. And it takes money to give everyone what they want.

The kinds of services covered her generally are referred to as municipal services, and they’re provided by the town, village, or city (or municipality) and sometimes the county. The primary way the municipalities pay for these services is by collecting taxes on real estate.

Why tax property instead of something like income? Real estate is hard to hide. The value is somewhat predictable. It provides a relatively stable way to collect the money needed for all those services you want.

A word that you need to know in connection with taxes is the word levy. It just means charged against, as in, “A tax of $1,000 is levied on that property.”

Taxes on real estate are called ad valorem taxes. Ad valorem means based on the value, and it refers to the fact that the taxes charged to a property are based on the value of the property. Ad valorem taxes sometimes are called a general tax or general real estate tax.

In some communities a single, or general, tax is levied, and it pays for all municipal services. In other communities where taxing districts are set up, a property owner may also pay separate school district taxes as well as taxes for specific services like sewers.

In some communities, a property owner may have to pay four or five different taxes on the same piece of property, with each tax designated to pay for a different municipal service.

Although probably not crucial for exam purposes, you may want to see whether your state uses real estate tax revenues to pay for its operations. Most states use sales and income taxes. Some states have passed laws to limit the amount of taxes a local municipality can collect or the amount tax rates can be increased. You should check to see if your state has any laws like this.

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