Property Tax: The Homeowner’s Complete Guide

Property tax applies to the real property you own, including the buildings and the land it sits on. While personal property can also be included, such as cars or business-related inventory, the most important item covered by property tax for most people is their home.

Property tax works differently in every state. But regardless of where you own a home, property taxes can take a bite out of your monthly budget. As you navigate homeownership, it’s critical to understand how property taxes work in general and also how property taxes work for your state.

What Is Property Tax And How Does It Work?

Property tax is a tax levied by your local and state governments based on the value of your property. The tax proceeds are used to cover taxpayer services, like public schooling and fire, police and public safety.

Property tax rates, known as millage (mill) rate, vary by jurisdiction. A mill rate is a tax you pay per $1,000 of your home’s value. With a $0.001 mill rate, you’ll pay $1 for every $1,000 in home value. The mill rate is multiplied by the assessed value of the property, which means that people with more valuable properties pay a higher property tax. Most areas charge property taxes semiannually, and you pay them in arrears.

Real Estate Tax Vs. Property Tax Vs. Personal Property Tax

Property taxes and real estate taxes are often used interchangeably, but real estate tax can be thought of as a type of property tax. The IRS calls property taxes real property taxes for land and things built on it. Personal property taxes refer to taxes on movable property, like a car.

How Do Property Taxes Work When You Buy A House?

When purchasing a home, a portion of closing costs will go toward paying property taxes, as well as a portion of the new homeowner’s monthly mortgage payment. Some homeowners pay their property taxes on a monthly basis through an escrow account. In this case, the mortgage lender will include a portion of your tax bill in your monthly mortgage payment. The funds will sit in an escrow account until a payment is due. At that point, the property tax bill will be paid from your escrow account.

Comparing Property Taxes In Different States

Where you live can affect how much you pay in property taxes as local governments use various methods to calculate their property tax base rate. The taxing jurisdiction typically determines the real property value by estimating what a property would sell for in a transaction, but others may base value on the last sale price or acquisition value of the property. Local jurisdictions may also consider the potential income the property could generate or base the assessment on the size or physical attributes of the property.

Here are ten states with the lowest property taxes.

How To Calculate Your Monthly Property Tax Payment

Property taxes are typically calculated by multiplying the property’s assessed value by the local tax rate. Tax rates and the exact process used by your local government are determined by your state and county.

Calculating your property tax payment can help you determine how much house you can afford.  Here’s a step-by-step guide on how to calculate your monthly property tax payment.

1. Use The Appraised Value

Property taxes are based on the assessed value of your home. An assessor from your locality will determine the assessed value of your home based on the value of similar homes in the area, market conditions and square footage. Some municipalities will order a home appraisal of your home to land on an assessed value.

Similar to a real estate agent conducting a comparative market analysis, an appraiser will review comps and take current market conditions into consideration when figuring out the property’s fair market value.

The local government will then take a percentage of the home’s market value to determine the assessed value. This percentage is called the assessment ratio or the percentage of the home’s value that’s taxable.

2. Multiply By The Millage Rate

You’ll need to look up your county’s mill rate and divide it by 1,000. Next, multiply your home’s assessed value (not appraised value) by the mill rate, and that’s your property tax liability.

For example, if your area's mill rate is 9.5 and your home’s assessed value is $350,000, you’d do the following:

9.5/1000 = $0.0095

$350,000 x $0.0095 = $3,325

You’d owe $3,325 in taxes per year. But if you qualified for any exemptions, you might be able to tap into a lower property tax bill.

3. Subtract Exemptions

Most areas offer property tax exemptions, which makes it easier for homeowners to afford their property tax bill. For some homeowners, the right exemption could lead to having no property tax bill at all. In many cases, you can subtract exemptions as a flat-dollar amount or as a percentage.

Property Tax FAQs

Here are the most frequently asked questions related to property tax.

When do I pay my property taxes?

Property tax due dates vary by location. Typically, property taxes are due annually, or semiannually (think summer and winter). Check with your local tax assessor’s office for due dates and more information.

What tax exemptions can I use for real estate?

Most areas offer a homestead exemption, which reduces the taxable value of a primary residence, lowering the amount you’ll owe in property taxes. States offer a homestead exemption either as a flat-dollar homestead exemption or a percentage exemption. Senior citizens, homeowners with disabilities and veterans may qualify for additional exemptions.

Are property taxes deductible?

Yes, property taxes are deductible. The Tax Cuts and Jobs Act capped the deduction at $10,000 ($5,000 if you’re married and filing separately) if itemized. The standard deduction amounts are indexed annually for inflation.

Do you have to pay property taxes?

All homeowners are required to pay property taxes. If you don’t pay your taxes, the county can put a lien on your property. This means they have the first claim to the proceeds when you sell the home unless you settled the lien before you sold the home.

The Bottom Line

Property taxes are an unavoidable part of homeownership. If you are considering homeownership, it’s critical to understand all of the costs involved before moving forward.

When you’re ready to buy a home, start your home buying journey online today to see what your home buying budget might be.