Disclaimer: This article is for informational purposes only. It does not intend to provide tax advice, and should not be relied on for tax purposes. Please consult with a tax professional regarding your own situation.
As Benjamin Franklin famously said, nothing is certain except death and taxes. The latter is especially true for homeowners who pay property taxes, which typically are based on their property’s value and pay for local services such as schools, emergency services, and road maintenance.
We’ll break down how property taxes work, how they’re calculated, and ways to potentially reduce your property tax bill:
- What Are Property Taxes?
- How Is Property Tax Calculated?
- Comparing Property Taxes by State
- How Are Property Taxes Paid?
- Ways To Potentially Reduce Property Taxes
- How To Dispute Your Property Taxes
- What If You Don’t Pay Your Property Taxes?
- Property Taxes FAQ
- The Bottom Line on Property Taxes
What Are Property Taxes?
Property taxes are assessed by local governments, school districts, and special districts on land within their jurisdiction, and any structures built on that land.
Property taxes are an important revenue source for local governments, and are the primary way schools get funded across the United States.
The idea behind property taxes is that people who own more property can afford to help fund local services and likely make use of those services. Thus, they should pay some of the cost of providing emergency services, road maintenance, schools, and other services. The more valuable a person’s property, the more they tend to pay.
How Is Property Tax Calculated?
The amount paid by a homeowner typically is determined by the value of their property and the tax rates set by local governments and jurisdictions.
Assessment and appraisal
To determine how much tax is due on a property, the taxing authority will assess the property’s value. Each government or district sets its own rules for how to assess value, and how often properties are assessed.
For example, in the city of Malden, Massachusetts, the assessor’s office gathers all “pertinent property characteristics for each parcel” each year. If the value of a home increases significantly from one year to the next, the tax bill for that property will reflect the higher value.
On the other hand, in California, Proposition 13 established limits on property tax rates, how much rates can increase from year to year, and that values can be assessed only when the property changes hands or new construction is completed on a property. This lets homeowners lock in their assessment when they buy the home and protects them against large increases in their property taxes.
There are a few methods that assessors commonly use to value properties.
With sales evaluation, the assessor determines a property’s value based on the price at which similar properties recently sold. For example, if a nearby home of roughly the same size and characteristics sold for $400,000, the assessor likely will appraise your property for about $400,000.
The cost method estimates how much it would cost to build a new structure on a property with an equivalent level of utility, based on current prices and standards. For example, if it would cost about $500,000 to build a home similar to yours on an equivalent property, the assessor will value your home at the same level, adjusting the value to consider wear and tear and the home’s overall condition.
Millage rate or mill levy
Once you know the value of the property being taxed, the next thing you need to know is the tax rate. Most property taxes are described as millage rates or mill levies — both refer to the same thing.
A millage rate is the amount paid per $1,000 of value. For example, a millage rate of 12 means that the property owner pays $12 for every $1,000 of a property’s value. On a home worth $250,000, that would come to $3,000.
Depending on where you live, you might have to deal with multiple millage rates for different purposes. For example, localities in Miami-Dade County in Florida have millage rates for schools, debt service, operating costs, and more.
Calculating the rate
To calculate the overall tax rate on a property, you’ll need to add up all the millage rates that apply, then divide by 1,000. Some governments offer a property tax calculator to make this easier to figure out.
Consider this example: Your town charges 12 mills for city services, 1.5 mills for debt service, 1 mill to pay for schools, and an additional 0.5 mill rate agreed to by voters to fund improvements to the local road system. Adding up those individual rates brings the overall property tax rate in your town to 15 mills. If you own a home with an assessed value of $250,000, your tax bill would be $3,750.
Comparing Property Taxes by State
Property taxes are typically imposed by local governments and school districts. While states might place limits on the maximum tax rates that can be charged, or on how much a city’s property tax receipts can increase from year to year, local governments otherwise are free to set rates as they see fit.
That can make it difficult to directly compare states, but averaging out property tax rates establishes a general picture of which states are more and less expensive. New Jersey has the highest average rate, at 2.13%, while Hawaii has the lowest, with an average rate of 0.38%.
Average Property Tax Rates by State
|State||Average Property Tax Rate|
How Are Property Taxes Paid?
There are two ways homeowners typically pay their property taxes.
This is like paying any other bill you receive, such as a mortgage or utility bill. The local government sends a property tax bill to you, sometimes quarterly, sometimes twice a year, and sometimes once a year. You pay the bill using whatever methods the government accepts, such as online transfers or a payment by check.
The drawback to this approach is that the bill can run several thousand dollars, so you need to have that money saved up and ready to pay the bill when it’s due. Not paying the bill can result in late fees, penalties, and potentially losing your home in foreclosure to the taxing authority.
To avoid problems, many homeowners pay their property taxes through an escrow or impound account managed by their mortgage lender.
The lender will estimate your annual property tax bill and divide the amount into monthly installments that it collects as part of your monthly mortgage payment. This cost is in addition to what’s due in principal and interest on your loan. Those funds are held in the escrow account, and your lender uses that money to pay the property tax bill in full on your behalf when it comes due.
This ensures your taxes are paid and eliminates the risk of the homeowner forgetting to pay the bill or not setting aside enough money to cover it. Escrow accounts also are used to pay other homeownership costs, such as homeowners association fees and homeowners insurance.
Some lenders require homeowners to have an escrow account, to ensure taxes and insurance are paid on time.
Ways To Potentially Reduce Property Taxes
While paying property taxes is an unavoidable part of owning a home, there are ways to potentially reduce your bill. Exemptions are a common way that many local governments help qualified homeowners lower their property tax bill.
A homestead exemption allows homeowners who live in their home to not pay tax on a certain amount of their assessed property value. This works much like a deduction does on your income taxes, and is usually expressed as a flat amount or a percentage.
For example, in Maine, homesteads can receive an exemption of $25,000. A home assessed at $250,000 for tax purposes would pay tax on $225,000 with the exemption.
This creates an incentive to live in the home that you own, and effectively imposes a higher tax rate on homes owned by real estate investors who rent out the home for profit instead of living in it.
Many older homeowners, usually ages 65 and up, could qualify for an exemption. As with the homestead exemption, the amount can be for a flat amount or for a percentage of the home’s value.
For example, in Massachusetts, older homeowners can receive an exemption for up to 5% of the average assessed value of all property in their city or town. If the average home in a town is worth $600,000, that means older homeowners can exempt $30,000 of their property’s value from taxes.
Governments frequently offer exemptions to people living with certain disabilities, such as blindness. For example, in Davidson, North Carolina, disabled veterans can receive an exemption of $45,000.
Time your home improvements
One unusual strategy for potentially reducing your property taxes is to avoid doing things that could boost your home value if you know an assessment is coming.
“When it comes to the actual review procedure, tax assessors are given a specific set of standards to follow,” says Adam Olson, marketing manager at Home Service Direct, a Huntington Beach, California-based marketing company for home service businesses. “However, there is still a degree of subjectivity in the evaluation. As a result, homes that are more visually appealing are generally rated at a higher value than comparable residences that are less visually appealing.”
So, if you’re about to put a fresh coat of exterior paint on your home or reseed your lawn, you might want to head off a potential tax hike and wait until after the assessor comes by.
How To Dispute Your Property Taxes
If you feel like the assessment for your home’s value is too high, consider appealing the assessment to your local tax board.
“Generally, taxpayers present evidence from appraisers, real estate brokers, and other professionals which show the value of the property is less than the taxing authority’s assessed value,” says Kelly McCann, an attorney with Burnside Law Firm in Portland, Oregon.
Each jurisdiction will have its own process for submitting appeals, so it’s important to look up your tax authority’s appeals process, consider working with an attorney, and pay attention to due dates.
For the best chance of success, you should provide evidence that the assessment is incorrect, such as:
- Examples of recent sales of similar homes at lower prices.
- Evidence of incorrect information included in your assessment, such as an incorrect square footage or number of bedrooms.
- Photographs of the property showing its current condition.
- Testimony from expert witnesses.
If you’re struggling to pay your property taxes regardless of whether the assessment came in too high, the best course of action is to look into state tax abatement programs. You also can reach out to your local government to ask for a deferral agreement or to set up a payment plan.
What If You Don’t Pay Your Property Taxes?
Paying your property taxes is important. If you don’t pay them, you’ll face late fees and interest charges. You’ll receive delinquency notices informing you of any unpaid taxes and the amount that you owe.
If you continue to ignore your tax obligation, a court could eventually allow the government to foreclose on your home.
You may still be able to get your home back during a specified redemption period, but to do so, you’ll have to pay all unpaid taxes, penalties, and fees.
Property Taxes FAQ
Here are answers to some frequently asked questions about property taxes on a home.
Yes. Deducting what you pay in state and local taxes — including property taxes — from your income is one of the tax benefits of owning a home. To do so, you must itemize your deductions on your return, and there is a maximum deduction of $10,000 for all such taxes.
There’s a subtle difference. Property taxes include all taxes on real and personal property, including real estate and other property, such as cars. That makes the real estate taxes you pay on the home you own a subset of property taxes.
The Bottom Line on Property Taxes
Property taxes are a cost that every homeowner faces. They’re determined by the value of your home and local tax rates. Knowing how to calculate property taxes, how to pay them, and how to make your tax bill more affordable is important because failure to do so can lead to penalties — and potentially the loss of your home.