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Property Taxes: What They Are And How To Calculate Them

Katie Ziraldo6-minute read

October 09, 2021

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Your property tax can make up a large portion of your monthly bills, depending on where you live. Knowing what they are and how they work is essential, so you choose the right neighborhood to live in.

It’s important to be able to afford the taxes, but it’s also important that they cover the amenities you want out of your neighborhood.

What Is A Property Tax?

Local governments levy property taxes on property owners within their locality. Governments use taxes to provide taxpayers with various services, including schools, police, fire and garbage collection. Property taxes are calculated by applying an assessment ratio to the property’s fair market value.

How Do Property Taxes Work?

State, county and local governments rely on tax funds to pay for services like schools, road maintenance and police and fire, among many other services. Depending on where you live, you may receive tax bills from the county, city and school district, but most areas provide one superbill for you to pay.

Every homeowner pays taxes based on their home’s value and the property tax rates for the county or city. Most areas charge property taxes semiannually, and you pay them in arrears. For example, in 2021, you’d pay the property taxes for 2020.

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What’s The Difference Between Property Taxes And Real Estate Taxes?

Property taxes and real estate taxes are interchangeable terms. The IRS calls property taxes real estate taxes, but they are the same in all aspects. The money collected helps the government fund services for the community.

Sometimes you’ll also see a special assessment tax. This occurs when your locality needs to raise money to fund a specific project.

How Are Real Estate Taxes Calculated?

The real estate calculation process is complex and varies by the state or county you live in. It’s always best to consult your state and county websites to learn the laws in your area and how taxes are assessed.

Below is a general overview of how real estate taxes are calculated.

Find The Assessed Value Of The Property

To find your property’s assessed value, the local government will order an appraisal on the property. Some areas conduct annual appraisals. Others do them every 3 years or less frequently (it varies by area).

Some localities use the market value (how much the home would sell for in the open market) and others use the appraised value (the value the appraiser determined for the home). Either way, they take a percentage of this value to come up with the assessed value.

The percentage they use is called the assessment ratio or the percentage of the home’s value that’s taxable. The ratios vary drastically around the country.

For example, if your home’s market value is $300,000 and your local government taxes 60% of the value, you’d pay taxes on $180,000 rather than $300,000.

Deduct Any Exemptions You Qualify For

Most areas offer property tax exemptions to certain demographics. The exemptions are an attempt to make it easier for homeowners to afford their property taxes. In some cases, it may even eliminate property taxes altogether.

Here are the most common property tax exemptions, but check with your local government to see what options you have.

Homestead Exemption

Most areas offer a homestead exemption or a discount for living in the property full-time. You won’t qualify for this exemption if you use the home as a vacation or investment home.

Senior Citizen Exemption

Many areas offer a senior citizen exemption which either discounts real estate taxes or freezes them at a specific rate. To qualify, you usually have to be of a particular age and live in the property full-time. This can be especially helpful if you’re on a fixed income.

Religious Exemptions

If your property is a church, religious or charitable institution, it may be exempt from real estate taxes.

Exemptions for Homeowners with Disabilities

If you’re a disabled homeowner (veteran or not), you may be eligible for an exemption that either reduces your tax liability or eliminates it. Every government has different rules and different exemptions based on the severity of your disability.

Apply Your Municipality’s Millage Rate

You’ll typically see property taxes noted as millage rates. A mill rate is a tax you pay per $1,000 of your home’s value. For every $0.001 mill rate, you’ll pay $1 for every $1,000 in home value.

It sounds complicated, but here’s a simple formula. Find out 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 8.5 and your home’s assessed value is $200,000, you’d do the following.

8.5/1000 = $0.0085

$200,000 x $0.0085 = $1,700

You’d owe $1,700 in taxes per year.

How Do I Pay My Property Taxes?

Every county has different rules when collecting tax payments. Some localities collect them annually, while others require payments quarterly or annually.

No matter how often your county collects payments, here’s how to pay them.

Make A Direct Payment-In-Full When Taxes Come Due

If you’re allowed and choose to pay your taxes yourself, you will pay them in full when they become due. Like we said earlier, some areas allow you to make quarterly or semi-annual payments to decrease the amount you’ll pay at once.

Either way, you’ll make the total required payment by the due date or risk paying penalties and facing a tax lien.

Establish An Escrow Account

If you financed your house, you might be able to set up an escrow account to pay your taxes. Your escrow payment will increase your monthly mortgage payments, but some borrowers are required to have an escrow account.

An escrow account is a separate account set up with your mortgage provider or mortgage servicer. Your servicer will estimate your property taxes for the next year, then break that amount into 12 payments – added to your monthly mortgage payment. That money is put into an escrow account and the lender uses that account to pay the taxes for you when they’re due.

Lenders often require an escrow account to avoid borrowers from defaulting on their property taxes. You may apply for an escrow waiver if you don’t want an escrow account, but a lender doesn’t have to approve it. Approval depends on your loan to value ratio, payment history and the age of your loan.

If you include an escrow account with your mortgage payment, your total monthly payment would include principal, interest, real estate taxes and mortgage insurance monthly.

What If I Disagree With My Property Tax Bill?

If you don’t agree with the amount of your property tax bill, you can appeal it. But the only factors you can appeal are the assessed value or a rejected exemption. The mill rates aren’t negotiable. They are the same throughout the area.

Every locality has a different procedure for appeals. Some require them in writing, and others require an appeal in person. They often have specific dates you can file the appeals, too. Check your locality’s website to determine the procedures for your area.

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What If I Don’t Pay My Real Estate Taxes?

Property taxes, like income taxes, are nonnegotiable, meaning you have to pay them. If you don’t, you put yourself at risk of mortgage liens or foreclosure.

A mortgage lien is a claim to your property until you make good on your liability, in this case, 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.

Sometimes, a mortgage lien can turn into foreclosure if you wait too long to pay the past-due taxes. In a foreclosure, you lose your home to the county who takes the portion owed to them for the taxes.

Where Are Property Taxes Lowest And Highest?

Note that the five states with the highest property taxes are:

STATE

REAL ESTATE TAX RATE

AVERAGE HOME  PRICE

ANNUAL PROPERTY TAX

New Jersey

2.49%

$335,600

$5,419

Illinois

2.27%

$194,500

$4,942

New Hampshire

2.18%

$261,700

$4,738

Connecticut

2.14%

$275,400

$275,400

Vermont

1.90%

$227,700

$4,135

And the five states with the lowest property taxes are:

STATE

REAL ESTATE TAX RATE

AVERAGE HOME  PRICE

ANNUAL PROPERTY TAX

Hawaii

0.28%

$615,300

$606

Alabama

0.41%

$142,700

$895

Colorado

0.51%

$343,300

$1,113

Louisiana

0.55%

$163,100

$1,187

District of Columbia

0.56%

$601,500

$1,221

 

Please note: This data is based on WalletHub’s 2021 findings; however, the numbers pull from the 2019 census. So, you may see some fluctuation between the numbers mentioned above and other reports, particularly the median home value. Prices may also change depending on market influences.

Are My Property Taxes Deductible From My Federal Income Taxes?

While property taxes may seem expensive, the good news is you can deduct them from your federal income taxes. The Tax Cuts and Jobs Act enforced a $10,000 cap for married couples filing jointly. This means you can deduct up to the first $10,000 paid in property taxes per year on your federal income taxes.

The Bottom Line: Property Taxes Pay For The Things You Love In Your Neighborhood

As you look for a home to buy, consider the property taxes. While they are an important part of the community and how you have services to protect and nourish you, keep an eye on the cost to make sure they are affordable for you. As you choose your next neighborhood, You’ll want to know exactly what to look for so you get what you want and what you can afford.

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Katie Ziraldo Headshot

Katie Ziraldo

Katie Ziraldo is a writer focused on financial learning for current and future homeowners. She found her love of writing through her experience working with various newspapers, such as the Detroit Free Press. Her financial literacy stems from her four years as a Recruiter, when she learned the details of every role in the mortgage process. As a writer, she uses that knowledge to create relevant content for homeowners to help them reach their goals.