Takeaways
- Property taxes are taxes imposed on the assessed value of homes and properties.
- Property taxes are charged by local governments and can change regularly.
- Property taxes are sources of revenue for local governments and municipalities.
- Homeowners pay annual property taxes and generally keep these payments in escrow.
- Property tax revenue funds school districts, road construction, and police and fire departments.
Owning your first home or real estate asset can be an exhilarating life milestone. First-time home buyers can finally toss out their rent payment and usher in a mortgage payment. Preparing for the full cost of homeownership includes saving for annual insurance and property tax payments. Property taxes can fluctuate over time based on the assessed value of your home. Understanding what property taxes are and how they are paid will set you up for financial success.
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What Are Property Taxes?
Property tax is a levy imposed by local governments on the value of real estate properties owned by individuals or businesses within their jurisdiction. These properties usually include assets like homes, land, and other real estate assets. Property taxes are a significant revenue source for local government services, including public schools, roads, parks, and public safety. Property tax is considered an ad valorem tax based on the value of the property being taxed.[1] Unlike other taxes, such as income or sales tax (which are based on transactions or earnings) property tax is based on appraisal value.
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How Property Tax Works
Property tax is calculated based on the property's assessed value, which a local assessor determines. These assessors have troves of data on recent sales data, local property values, and detailed information on properties in their justification. An assessor may have a different estimate from the property's actual market value. The market value is the actual selling price of the home. However, the assessed value is calculated based on variables like property size, location, and recent improvements.
Once the assessed value is determined, local governments apply a property tax rate, known as the millage or mill rate, to calculate the property tax owed. The millage rate represents the amount of tax per thousand dollars of assessed value. For instance, if the millage rate is 10 mills and a property's assessed value is $100,000, the property tax would be $1,000.
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How to Pay Your Property Taxes
Mortgage lenders and banks are highly incentivized to ensure your home doesn’t fall into the hands of your local tax collector. As a result, they generally try to make the process of paying your property taxes part of your monthly mortgage payment. Here are the two main ways to pay your property taxes:
- Escrow Account: Your mortgage provider includes the estimated cost of your property taxes in your monthly mortgage payment. These funds flow into an escrow account that holds your funds until paid to your local tax office.
- Write a Check: Alternatively, you can pay your tax bill monthly, quarterly, or annually to your local tax office. Most homeowners opt to include their anticipated property taxes in their monthly mortgage payments.
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How to Calculate Property Tax
Calculating property tax involves a straightforward yet essential process, ensuring homeowners accurately meet their tax obligations. Here's a detailed exploration of the steps involved in calculating property tax and considerations for homeowners:
1. Determine the Assessed Value
The first step in calculating property tax is determining the property's assessed value. Local government assessors are responsible for evaluating properties within their jurisdiction to ascertain their value for taxation purposes. The estimated value may not always align perfectly with the property's market value, but it is the basis for calculating property taxes.
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Assessors consider various factors when determining the assessed value, including property size, location, improvements, and comparable sales data. By conducting a thorough assessment, assessors strive to ensure fairness and accuracy in property valuation.
2. Find Your Applicable Millage Rate
The first step in calculating property tax is to determine the property's assessed value. Local government assessors are responsible for evaluating properties within their jurisdiction to ascertain their value for taxation purposes. The estimated value may not always align perfectly with the property's market value, but it is the basis for calculating property taxes.
Assessors consider various factors when determining the assessed value, including property size, location, improvements, and comparable sales data. By conducting a thorough assessment, assessors strive to ensure fairness and accuracy in property valuation.
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3. Multiply the Assessed Value by the Millage Rate
With the assessed value and millage rate determined, homeowners can proceed to calculate the property tax owed. The calculation involves multiplying the property's estimated value by the millage rate.
It's essential to note that property tax rates and assessment methods can vary significantly from one jurisdiction to another, so homeowners should consult their local tax assessor's office for specific information.
Property taxes can also be calculated using the local property tax rate. In this case, the assessed value is multiplied by the local tax rate to produce the property tax owed.
Property Tax = (Assessed Value of Real Estate) x (Local Tax Rate)
Assessed Value of Real Estate = $500,000
Local Tax Rate = 2%
Property Tax = $500,000 X 2%
Property Tax = $10,000
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Where Do Property Taxes Go?
Tax revenue is allocated to a broad spectrum of local municipal projects and systems, which varies by state and country. In general, property tax revenue is used to fund:
1. Public Education
Funding for K-12 schools is a primary use of property tax revenue in many areas. Property taxes help pay teachers' salaries, school supplies, building maintenance, and other educational expenses.
2. Infrastructure
Property taxes support maintaining and improving roads, bridges, water systems, and other essential infrastructure projects. Local governments use property tax revenue to repair existing infrastructure and build new infrastructure to accommodate growing communities.
3. Public Safety
Police and fire departments rely on property tax revenue to provide emergency services to communities. Property taxes help fund police officers, firefighters, emergency medical services, and equipment needed to respond to emergencies.
4. Parks and Recreation
Do you enjoy your local park? Well, property taxes fund the maintenance of parks, recreational facilities, and green spaces for public use. Property taxes help pay for park maintenance, landscaping, playgrounds, and community centers that provide recreational opportunities for residents.
5. Other Municipal Services
In addition to other services, property tax revenues can support your local library system, waste management, zoning enforcement, and other local government functions. Many of these municipal services rely on annual tax revenues to continue operations.
States With the Highest Property Tax
Conversely, some states have relatively high property tax rates compared to others. Factors contributing to higher property taxes may include high levels of public services, expensive real estate markets, and limited alternative revenue sources. States with the highest property tax rates in the nation include:
- New Jersey
- New York
- New Hampshire
- Connecticut
- Vermont
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Do Property Taxes Affect Everyone?
While property taxes are a vital source of revenue for local governments, they can also be a source of strain for homeowners and renters. Property tax increases can place a financial burden on homeowners, especially those on fixed incomes or in areas experiencing rapid gentrification.
Even if you rent, you can expect to be affected by local property tax increases. Real estate owners tend to pass on the increases in property taxes to their tenants. This allows real estate investors to keep their margins and return on investment.
How to Lower Your Property Taxes
To complicate matters further, tax assessments are only sometimes accurate. This can lead to disagreements between homeowners and local assessors over the value of their real estate. You can file appeals to challenge your property tax assessments and seek adjustments to reduce your tax bills. During this process, you will file paperwork to show that the appraiser’s assessed value does not match your home's actual value.
Smart Summary
Owning a homeowner can be one of the best financial decisions you ever make if you are finally prepared. Part of homeowner preparation is budgeting for all the costs associated with owning a home, and taxes are part of that equation. Understanding how property tax works, including assessment methods, calculation formulas, and allocation of revenue is crucial for you to know. Take control of your finances with solid financial planning and consult with property tax experts to help you.
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Frequently Asked Questions
Yes. Even if you rent your apartment or house, part of your rent goes toward local property taxes. Your landlord takes care of this all behind the scenes.
Property taxes can change from increases in the assessed value of your house or property. Alternatively, your local county or municipality could vote to increase property taxes. You can find your property tax rate at your local tax office.
As a homeowner, you want to do everything possible to stay current on your property taxes. Not paying your property taxes in full or on time could result in the country or local government placing a tax lien on your house. A tax lien is the government’s legal claim against your property.[1]
(1) Internal Revenue Service. Understanding a Tax Lien. Last Accessed January 19, 2025.
