Property Taxes: What They Are, How They Work And How To Calculate Them
UPDATED: Jan 23, 2024
Understanding what property tax is will be a vital consideration when purchasing a home. This tax is significant as it helps state and local governments earn revenue in order to maintain and complete infrastructure projects around the community. The amount you’ll pay in real estate taxes will differ depending on factors such as your location and home value.
What Is Property Tax?
Property taxes are imposed on all real estate within a locality’s border. Sometimes, property taxes are also collected on tangible personal property, like boats and cars. In most cases, property taxes are based on a percentage of your property’s current fair assessed value — the rate is set by your county or municipality.
What Are Property Taxes Used For?
Money collected from property taxes goes toward funding amenities and community-based services like water and sewer fixtures, police and fire departments, schools and libraries. In some cases, a percentage of collected taxes goes directly to the state — particularly in low- or no-income tax states — to pay for infrastructure like roads and bridges.
How Do Property Taxes Work?
Municipalities express their property taxes as millage (mill) rates. This mill rate is what you pay in taxes for every $1,000 of the home's value. For example, a $0.0001 mill rate means you pay $1 for every $1,000 of your home's value. Note that the market value of your home isn’t what the municipality uses — it typically uses a percentage of your home's value, or assessment ratio, and can vary from location to location. The municipality takes into account any exemptions you may qualify for when coming up with a taxable value for your property.
How To Pay Property Taxes
Property owners may have several options when paying their property taxes. In most cases, you can pay the country treasurer by check or online directly. For those who have a mortgage, your lender may be the one to pay it. The lender holds money in an escrow account that you pay into on a regular basis, and when your property taxes are due, the money is forwarded to the county treasurer directly from your escrow account.
How To Calculate Property Tax
Most states conduct property tax assessments every 5 – 7 years, but some conduct them once a year or only when a property is being sold or financed. Municipalities use the mill, or tax rate, and the assessed value of your home to calculate the property tax. Your taxable property is found by subtracting any qualifying exemptions from the assessed value of your property.
In some cases, you may be able to qualify for exemptions — the homestead exemption is a common one — which offers a deduction in the amount you pay in taxes. Check with your local and state governments to determine if you qualify for any exemptions.
The formula is as follows:
Mill Rate X Taxable Property = Property Tax
For example, your municipality’s millage rate is 7.5 (expressed as 0.0075) and the assessed value of your property is $300,000, but you qualify for $25,000 in exemptions. Therefore, the amount you’ll pay in property taxes is $2,062,50.
0.0075 x $275,000 = $2,062.50 in property taxes
Property Tax FAQs
Want to understand more details about how property taxes may affect you? Check out these commonly asked questions.
When are property taxes due?
Property tax due dates vary depending on the state and municipality each year. However, they’re generally due once a year around the same month and date. Some states may offer discounts if you pay your taxes early.
What are property taxes based on?
Property taxes are based on the local property tax rate and the assessed value of your property. It includes the land and any buildings located on it and is typically reassessed every few years.
Are property taxes deductible?
Property taxes are deductible if you itemize on your federal income tax return. However, you’ll face limits – the deduction for state and local taxes is typically capped at $10,000.
Are property taxes and real estate taxes the same?
Yes, property taxes and real estate taxes are generally the same.
What if I don’t agree with my property tax assessment?
You can start an appeals process if you don’t agree with your property tax assessment. You can start by contacting your local assessor directly to learn how your home’s property tax assessment was prepared and ask them to document where they think the assessment is incorrect. Your goal is to gather as much data as possible so you can present a strong case against your original property tax assessment before the deadline for appeals are due.
What happens if I don’t pay my property tax?
Failing to pay your property tax will result in legal action. More specifically, a legal claim against your property and financial assets called a tax lien may be placed on your property.
The Bottom Line: You’ll Pay Off Your Mortgage, But Property Taxes Last Until You Sell
Property taxes will always be one of the costs of homeownership, even when you’ve paid off your mortgage. To help you factor property taxes into your budget, consider using tools such as Rocket MoneySM app to help you keep track of your finances.
Sarah Li Cain
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