If you own a home, land, or other real estate, you're probably familiar with property taxes. Local governments collect these taxes to fund projects and services that benefit the community -- things like schools, roads, libraries, law enforcement, and fire departments. In general, property taxes are based on the property's location and taxable value.
What is property tax?
Property taxes are an ad valorem tax, meaning they're based on the property's assessed value. All real property (aka real estate) owners pay property taxes, which are calculated and collected by the local government where the property is located.
Property taxes vary widely across the U.S. At 2.21%, New Jersey has the highest effective rate on owner-occupied property, followed by Illinois (2.05%), New Hampshire (2.03%), and Vermont (1.80%), according to data from the Tax Foundation. The lowest rates are in Hawaii (0.30%), Alabama (0.40%), Louisiana (0.52%), and Wyoming (0.55%).
How to calculate property taxes
To calculate property tax, you multiply the property's taxable value by the local tax rate:
Property tax = taxable value * tax rate
Here's a closer look at these two components:
Municipalities employ assessors to determine the assessed values of every property within a tax district. Depending on the area, this might be done each year, every other year, whenever the property is transferred, or on some other schedule. Keep in mind that the assessed value is not the same as your property's purchase price. In many cases, the assessed value is lower than both the purchase price and the appraised value.
To figure out a value for tax purposes, the assessor looks at several factors, including:
- Sales prices of comparable properties ("comps") in the area
- Property's replacement and maintenance costs
- Value of any recent improvements
- Property's income potential
Once the assessor determines your property's assessment value, they'll deduct any tax exemptions you qualify for (which could lower your tax bill). Depending on where you live, an exemption may be available for:
- Agricultural properties
- Charitable organizations and businesses
- Military veterans and veterans with disabilities
- Older adults
- People with disabilities
- Principal residences
- Renewable energy systems
- Surviving spouses
- Volunteer firefighters
Next, that number is multiplied by an assessment rate (or assessment ratio), a set percentage each tax district uses to determine the taxable value of properties. So, for example, if your property's assessed value is $200,000 and your local assessment rate is 90%, the taxable value of your property would be $180,000 ($200,000 * 0.90 = $180,000). That's the amount your local tax office uses to calculate your property tax bill.
Taxable value = assessed value - exemptions
Of course, the higher your property's assessed value, the higher your property tax. You can contact your local tax assessor to find out your property's tax rate, or you can search by state, county, and ZIP code at Netronline's public records online directory.
To calculate your tax bill, the tax office multiplies your property's taxable value by the local millage rate, or mill rate. Typically, the tax rate is expressed in terms of a certain number of mills rather than as a percentage.
One mill is equal to $1 in property tax for every $1,000 in the property's taxable value. So, if your local property tax rate is 10 mills, you would pay $10 in tax for every $1,000 in taxable value or, for example, $3,000 on a property that has a taxable value of $300,000 ($300,000 * 0.01 = $3,000).
How are mill rates set?
Local governments set mill rates by dividing the budgeted revenue by the total assessed value of properties within the jurisdiction. So, for simplicity's sake, say your town has a budget of $2,000, and the properties have a collective assessed value of $500,000. The tax rate, then, would be $2,000 ÷ $500,000, or 0.40% ($2,000 ÷ $500,000 = 0.004; 0.004 * 100 = 0.40%).
Why do property taxes differ from place to place?
Property taxes are a primary source of local revenues. They vary by municipality, depending on the area's property values and revenue requirements. Areas with high property values can assess lower tax rates to raise the same revenue as areas with lower property values, and vice versa.
Tips for lowering your property tax bill
Property taxes are often higher than property owners expect (or hope for), and they tend to rise over time. The good news is that there are ways to lower your property tax bill. Here are a few steps to take if you think you're paying too much:
- Question your property's assessed value. Your property tax bill is based on the taxable value of your home (assessed value minus any exemptions), multiplied by the local tax rate. If you think the assessment is too high, request a copy of your property tax card from your local tax assessor's office. The card provides details about the property, including the lot size, square footage, and information about any special features and recent improvements. If anything on the card looks amiss, you can make an inquiry with the tax assessor.
- Review comps. Assessment information is available to the public, so you can research other properties in your area to see if their values make sense compared to yours. If you think there's been a mistake, contact your assessor and ask for a reassessment, if necessary.
- Postpone improvements. Planning a kitchen remodel? Wait until after the next scheduled assessment to get started, and you'll keep your taxes lower for the next year or two, depending on your town's rules. It's also a good idea to hold off on any curb appeal enhancements that can trigger higher assessments.
- Do a walk-through with the assessor. When it's time for the tax assessor to visit your property, plan to join them to provide a guided tour. Otherwise, the assessor may focus only on the attractive elements of the property -- and miss any deficiencies that could lower valuation.
- Welcome the assessor. In some towns, the assessor automatically assigns the highest possible rate for the property type if they aren't granted entry. It's usually in your best interest to give the assessor free range of your property.
- Apply for exemptions. Exemptions can lower your tax bill, but you usually have to apply for them. Contact your local tax authority to see if you qualify for any exemptions and inquire about the application process.
- Pay early. Some municipalities offer discounts if you pay early. Ask your local tax office to find out if any discounts are available in your area.
- Appeal your tax bill. If you think your tax bill is too high (because your assessed value is too high), and the tax assessor's office doesn't agree, it may be time to file an appeal. Depending on where you live, you can file an appeal online or by mail. Call your assessor's office to learn about the appeals process, and make sure you follow the directions. Appeals generally involve submitting evidence (e.g., documents, receipts, and photographs) supporting your claim and then waiting for a verdict.
How to pay property taxes
There are two ways to pay your property tax bill:
- As part of your monthly mortgage payment.
- Directly to your local tax office.
If you've financed your property with a mortgage, your property taxes might get rolled into the monthly payment. If so, your lender divides your annual tax bill by 12 and includes that amount in each payment.
Otherwise, you'll pay the tax office directly. Depending on where you live, you might be able to pay by check, online using a credit or debit card, online using an electronic check (an "eCheck"), or over the phone. Keep in mind that you might get charged a convenience fee if you use a credit card to pay your bill.
All real estate owners pay property taxes
If you own real estate, you'll owe property taxes. That's true even after the kids have moved out, and you've paid off the mortgage. You can't avoid property taxes, so it's essential to pay attention to your local tax rate and assessed value. That way, you can prepare for your tax bill -- and make sure you don't overpay.