What Is Property Tax And How To Calculate It

When you think of property taxes, your mind might be tempted to just move along to the next subject. Let’s be honest, mulling over the definition of property tax and how to calculate it just isn't the most fun thing to think about. We probably can’t solve that problem, but we can make understanding what property taxes are, how they work, and how they apply to your finances a little bit easier.

Property tax: the basics

Like any tax, property taxes are levied by your local municipality to pay for things like roads, schools, public transportation, parks, police, firefighters and other services that make your city hum along each day. Property tax, which is also sometimes referred to as real estate tax, has to do with what you pay in taxes on your real property. Your real property consists of the land you own and any structures attached to it that factor into the property’s value, like your house. The more your real property is worth, the more you will pay in property taxes. The amount also varies from state to state, so be sure to investigate how property taxes are calculated in your specific locale.

Who pays property taxes?

Owners of real property pay property taxes, usually through an escrow account. The escrow account holds a portion of your monthly mortgage payment and then automatically pays your tax bill when it is due. You can opt out of putting your taxes in escrow each month and just pay them on your own, but most homeowners don’t go this route.

“What if I don't pay?” you may be wondering. Well, the county you live in can put a lien on your home. When you sell the property, they will collect back taxes (with any applicable penalties of course) before you see any proceeds.

When do you pay property taxes?

The schedule for paying taxes for each city, town, village, etc., can vary from monthly to annual to semiannual, depending on where you live. Having funds taken from your mortgage payment each month and kept in escrow is a great way to make sure your taxes get paid, even if you don’t know the specific due date for taxes in the municipality you live in.

How to calculate property taxes

As previously mentioned, property taxes are different by state, so you’ll need some more specific info to get an exact amount. Here’s a good place to start though: In most cases, property taxes are calculated by multiplying the local tax rate by a specific property’s assessed value.

1. Determine the assessed value of the property

So, first you need to determine the assessed value of your property before multiplying it by the local tax rate. To do this, go to your local municipality’s online tax resource and look up your property. An assessor from your city has created an assessed value based on your home’s size, recent sales in the area, the state of the local real estate market, and other factors.

Keep in mind that your assessed value isn’t going to be the same as your appraised value or market value, because they are only going to assess the taxable value. This is based on something called an assessment ratio. For example, if your home’s market value is $400,000 and your local government taxes 50% of the value, the assessed value would be $200,000.

2. Deduct qualifying exemptions

Not liking all this talk of taxes you have to pay? Well, there’s hope in the form of property tax exemptions! Most areas around the country offer these exemptions to make owning a home more affordable. See if you qualify for any of these common property tax exemptions.

• Homestead exemptions: A homestead exemption provides tax relief for people who live in their property most of the time. Vacation homes or investment properties don’t qualify for this.
• Senior citizen exemptions: Many places offer tax relief to seniors who live in their primary residence on a fixed income.
• Homeowners with disabilities exemptions: If you have a disability, there may be tax deductions that can make your property taxes more affordable. In some cases, you may be exempt from paying any property taxes at all.
• Veteran exemptions: Military veterans and active-duty service members can also qualify for property tax relief, depending on where they live.
• Agricultural exemptions: If you are using your property for agricultural purposes, your local government might offer some property tax relief.

3. Apply your municipality’s millage rate

Once you take out qualifying exemptions from your assessed value, it’s time to apply your municipality’s millage rate. What’s a millage rate, you ask? This term refers to the property tax you owe for every $1,000 of your property’s value. As an example, if your county has a $0.001 millage rate, your property taxes would be $1 for every $1,000 in assessed value. Simply multiply your property’s assessed value by the mill rate, and that’s your property tax liability.

As an example, if the mill rate is $0.0075 and your home’s assessed value (after taking out exemptions) is $200,000, the following calculation would apply:

$200,000 x $0.0075 = $1,500 owed in property taxes (per year).

Can you deduct property taxes on your tax return?

Yes, many taxpayers can deduct property taxes on their tax return. The rules are different everywhere and often change though, so be sure to consult a tax professional before deducting property taxes on your tax return.

The bottom line

Buying property can be a rewarding journey, both financially and emotionally. Learning about your property taxes and how they are calculated might not be as emotionally fulfilling as envisioning your family in your new home, but it’s an important part of understanding your complete financial picture.

Hopefully you feel a little more informed about property taxes now, but be sure to continue your research by looking into the rules around property taxes in the specific area you live (or want to live). Ready to start your home buying journey? You can begin the approval process today!