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.
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.
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.
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.
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.
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.
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:
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.
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.
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.
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 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.
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:
$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.