Alabama has proven to be an excellent place for a property owner to invest in. Many real estate opportunities out there could certainly give you steady returns over time.
Before you invest in any property in Alabama, there are a few things you must consider to get the most value out of your purchase. One of these things is property tax.
Alabama property taxes are one of the biggest players in any financial plan for real estate. All investors, property managers, and landlords must keep these taxes in mind if they want to plan their finances accordingly.
First, you must calculate how much Alabama property tax you have to pay per year. Unfortunately, this process tends to get confusing at times.
We want to help you make the most out of your next residential property investment, which is why we created this guide to understand Alabama taxes. By the time you're finished reading, you'll have all the information needed to get your investment plan started.
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Types of Property Tax Bills in Alabama
In Alabama, you'll have "ad valorem taxes," which means that you'll pay taxes based on your property's assessed value. Besides that, property owners also have to consider their "millage rate" and the exemptions. This gives them their adjusted tax bill.
Another thing to keep in mind is that Alabama has a policy of "annual equalization." It refers to the reassessment of one-quarter of a county each year. In other words, all properties are re-assessed every four years.
All properties in Alabama are assessed at a uniform rate by the Alabama Department of Revenue. Before calculating your unadjusted/adjusted tax bill, you'd have to evaluate your property classification. Here's an overview:
- Class I - Utility properties that are used in the utilities business. 30% of assessment.
- Class II - Every property that doesn't meet any of the other classes. 20% of assessment.
- Class III - Agricultural, residential, or forested lands. The classification also applies to historic sites. 10% of assessment.
- Class IV - Private passenger automobiles or "pickups" meant for individual use. 15% of assessment.
The millage rate is determined by county commissions and other related taxing agencies. Your "millage" is your tax rate expressed in decimals.
As a reference, a mill equals one-tenth of one cent (.001). 1,000 mills, for example, would equal $1.
Exemptions exclude particular factors from tax. If you apply for some of these exemptions, you could save money when paying property taxes.
How Frequently Do You Have to Pay Property Taxes in Alabama?
Your property taxes in Alabama are due on October 1st of each year. Each property owner has until December 31st to pay; otherwise, your payment will become delinquent, meaning you'll be subject to extra fees and other consequences.
What Are the Consequences of Late Payments?
The consequences of not paying property taxes for any land owned are straightforward.
First, you would get a $5 penalty for any late payment, plus 12% in interest penalties annually, which compound daily. If you still don't pay your taxes, the amount you owe will become a lien on your property.
When property owners have a tax lien on their property, a taxing authority can hold a tax lien sale. In other words, a bidder can get the title to your property. These "tax sales" are generally held in May.
You have three years to pay the buyer your property tax and recover your property. This is called "redeeming your property." Remember you would also have to pay for compounded interest plus expenses, as well as any interest on the sale amount.
It's possible that no one buys your property in a tax lien sale. In that case, your unsold lien would be included in future auctions.
If you feel like you can't afford your property taxes, you must act before your payment becomes delinquent. You could try to apply for a property tax abatement or request a re-evaluation of your property's assessed value.
How to Pay Your Property Tax Bill in Alabama
The state makes the payment easier by offering plenty of methods to get it done. You can either pay in person at your local county courthouse, mail your payment, or go to the "Make a Payment" section in the Alabama Department of Revenue and pay online.
How Much Is Property Tax in Alabama?
Your property tax depends on the three factors we already mentioned: property classifications, millage rates, and exemptions.
Once you get your property's classification, you can move on to calculate your unadjusted/adjusted tax bill.
How Is Property Tax Calculated in Alabama?
There are three easy formulas you must consider to calculate your property taxes in Alabama:
- You'll get your assessed value by multiplying your appraised value by your property classification (Appraised Value x Property Classification = Assessed Value).
- Then, you must take that assessed value and multiply it by your millage rate. Remember that your rates can be set by the state, the county commission, and possibly other taxing agencies (Assessed Value x Millage Rate = Unadjusted Tax Bill).
- Finally, you must take your unadjusted tax bill and subtract your exemptions, if there are any (Unadjusted Tax Bill - Exemptions = Adjusted Tax Bill).
Is There a Way to Lower Your Property Taxes in Alabama?
Property taxes can be a burden to anyone due to how high they can be sometimes. Thankfully, Alabama property taxes are among the lowest in the country.
Even though your taxes won't be necessarily high all the time, you may still apply for certain exemptions.
Essential Exemptions in Alabama You Should Know About
You can apply for a homestead exemption if you buy a single-family home and have it as your primary residence. Keep in mind that the home must have less than 160 acres. You'll need a copy of your property's Deed, as well as a driver's license from Alabama that matches the property's address.
People who have an out-of-state license may have to submit additional documents.
If you want to apply for a homestead exemption, make sure to visit the Revenue Commissioner's Office.
Second Home Exemption
You may apply for a second home exemption if you own a cabin, lake house, or any other secondary property. Keep in mind that you can't apply if you're renting that second home.
If you're at least 65 years old and your taxable income (including your spouse's, if you have one) is $12,000 or less, you could apply for an exemption for your principal residence. However, you must be able to show proof of your tax return from last year.
Current Use Exemption
You may apply for a "current use" exemption if you're using your property for agriculture or timber.
Homeowners over 65 are exempt from paying the state's portion of their property tax. Those who are permanently disabled could also get an exemption from that portion of their taxes.
Property taxes can be tricky to understand at first. Thankfully, the state of Alabama has a straightforward process to calculate and pay your taxes.
The best way to deal with your property taxes is to plan ahead. Since you have a set date every year to pay, make sure to prepare accordingly and find out if you can apply for any exemptions. This will make the process much easier.
If you're looking for more tips on property management accounting, check out our whitepaper on the best tips for simplifying this complex process.