Property Taxes: What They Are And How To Calculate Them

How do property taxes work? 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.

Here’s a breakdown of what property taxes are and how to calculate tax rates.

What Is Property Tax?

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

Property owners in different states will likely see vastly different rates, even with a similar property value. For example, a taxpayer in Connecticut will likely pay higher property taxes than one in West Virginia. New York and Illinois are also known for having high property tax rates.

Is Real Estate Tax The Same As Property Tax?

So what are real estate taxes? Technically, property taxes and real estate taxes are interchangeable terms. The IRS calls property taxes real property taxes, but they’re the same in all aspects. However, personal property taxes refer to taxes on movable property, like vehicles.

Do You Pay Property Taxes Monthly Or Yearly?

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 2024, you’d pay the property taxes for 2023.

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 earmarked for taxes 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 for easy accessibility.

How To Calculate Property Taxes

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

You can take a closer look at the process in our step-by-step guide below.

1. Determine The Assessed Value Of The Property

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 an appraisal of your home to land on an assessed value.

It's important to note that the assessed value isn’t the same as the home’s market value or appraised value. Instead, the local government will likely take a percentage of this standardized value to determine the home’s assessed value. The percentage they use is called the “assessment ratio” or the “percentage of the home’s value that’s taxable.” These 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, the assessed value would be $180,000 rather than $300,000. The assessed value will serve as the base for your tax obligations.

2. Deduct Qualifying Exemptions

Most areas offer property tax exemptions. Generally, an exemption 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.

As a homeowner, it’s worthwhile to scope out any potential exemptions you might qualify for. In the following sections, you’ll find information about some of the most common property tax exemptions:

Homestead Exemptions

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 Exemptions

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.

Homeowners With Disabilities Exemptions

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.

Veteran Exemptions

Veterans and active-duty service members who live in a home full-time might qualify for property tax exemptions. Check with your local and state government to see if you qualify for this type of exemption.

Agricultural Exemptions

Agricultural exemptions for property tax are benefits or reductions in property taxes granted to landowners who actively use their property for agricultural purposes.

These exemptions aim to support and incentivize agricultural activities by reducing the tax burden on qualifying properties. This kind of exemption requires that the land be used for farming, ranching or other agricultural purposes as defined by the local laws.

3. 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. With a $0.001 mill rate, you’ll pay $1 for every $1,000 in home value.

It might sound complicated, but here’s a simple formula.

First, 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 $180,000, you’d do the following:

8.5/1000 = $0.0085

$180,000 x $0.0085 = $1,530

You’d owe $1,530 in taxes per year.

But if you qualified for any exemptions, you might be able to tap into an even lower property tax bill. For example, a homestead exemption of $50,000 would lead to an assessed value of $130,000 in our example. In that case, you would owe $1,105 in property taxes each year.

Property Tax FAQs

Curious about the ins and outs of property taxes? We'll break things down a bit more.

How do I pay my property taxes?

Some localities collect property taxes annually, while others require payments quarterly or semi-annually. You might choose to make a direct payment in full by the due date or establish an escrow account for your tax bill. The escrow account will hold an earmarked portion of your monthly mortgage payment until the tax bill is due.

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. Some localities require appeals in writing, and others require an appeal in person, so check your local website to determine the appropriate procedures and deadlines.

What happens if I don’t pay my 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.

Are property taxes deductible?

In most cases, you can deduct real estate taxes from your federal income taxes if the property taxes were levied for the general public welfare. The rules surrounding this type of deduction can change, so consult a tax professional before pursuing property tax deductions.

When are property taxes due?

Property taxes are typically due annually, with specific due dates varying by location and jurisdiction. Check with your local tax authority or review your property tax bill for the exact deadline each year.

The Bottom Line: Property Taxes Are Inevitable, But Don't Have To Break The Bank

Property taxes are an unavoidable part of homeownership, but they don't have to hamper the experience for you. If you're considering homeownership, take time to understand all of the costs involved.

Ready to start the home buying process? Begin the approval process today with Rocket Mortgage^®.