Mortgages

What are property taxes?

By
Social Links for Lauren Ward ,
edited by
Maddie Lloyd
Updated June 26, 2023, 8:16 p.m. ET
A man looks at his property taxes on his laptop.
Shutterstock

Property taxes are an important bill that’s part of almost every homeowner’s future. Unless you qualify for an exemption, you’ll likely pay taxes to your local government based on the value of your property. 

Here’s everything you need to know about property taxes, from how they’re calculated to how to pay them. 

What are property taxes?

Property tax is a fee levied by state and local governments and may apply to certain types of property, such as land, buildings, or vehicles. Different jurisdictions have their own regulations on what types of property are subject to taxes and at what rate. The revenue raised through property tax collection is typically used for municipal projects like roads, public schools, police departments, and libraries. 

Local governments at the city or county level are responsible for property taxes charged on real estate. It’s important to know about property taxes when buying a home because this annual charge is usually split up into monthly payments and added to your mortgage bill. Lenders consider the cost of taxes (as well as homeowners insurance) when determining how much you can afford to borrow for a home. 

How do property taxes work

Your local government charges a tax on your property based on the assessed value of the property. 

What’s a property tax assessment?

Every city or county government has an assessor’s office tasked with assigning a monetary value to real estate. The city or county assessor calculates the value of a home, usually on a schedule. In some jurisdictions, property may be reassessed every year.

Assessors may use these three methods:

  • Replacement method: Estimates how much it would cost to replace your home, plus the cost of the land.
  • Sales comparison method: Uses recently sold homes as comparisons to calculate your home’s current fair market value. 
  • Income method: Determines income potential if the property were to be rented out. This method is usually reserved for commercial properties.

How are property taxes calculated?

The amount you’ll actually pay on your property is based on the assessed value. Each jurisdiction applies its own tax rate and that rate is multiplied by the value, which gives you the annual tax charged.

For example: Say your city charges a 1% tax rate and your property’s assessed value is $300,000. You would multiply 300,000 by 0.01 to get your annual property tax: $3,000.

Alternatively, your local government may charge property tax as a set amount per $100 or $1,000 of assessed value. For instance, Richmond, Virginia charges $1.20 per $100 of the assessed value. On a $300,000 home, that would amount to $3,600 per year. 

How do I pay my property taxes?

When you have a mortgage on your home, your mortgage servicer typically includes the property tax amount in your monthly payments and holds the funds in an escrow account. When these local taxes are due (usually once or twice a year), the mortgage servicer pays the bill on your behalf. 

If you don’t want your property tax included in your mortgage payment, you’ll need to ask your lender for an escrow waiver. In that case, you’ll get a bill from your local assessor’s office and pay them directly. 

If your property taxes are held in an escrow account, you also must pre-pay a prorated portion of your property taxes as part of your closing costs. This ensures you have enough money in your escrow account for the next due date. Your lender can give you an estimate of your closing costs so you know exactly how much cash you’ll need upfront. 

Why are property taxes important when I buy a home?

It’s important to consider property taxes for several reasons when buying a home. First, these taxes can impact both your closing costs and mortgage payment. House listings typically show the most recent tax assessment and annual property tax bill so you can get a sense of what to expect.

But property taxes also matter once you’ve moved in. If home values increase significantly in your area, your assessed value will likely rise along with it. This means your property tax bill could also change significantly. 

What are property taxes in my state?

Both tax rates and property values may be higher or lower depending on the state, county, and city you live in. According to data from the Tax Foundation, New England and coastal areas of California tend to have the highest property taxes in the country, while the South and parts of the Midwest tend to be less expensive tax wise. 

But there are major differences even in local jurisdictions. Living in a city usually comes with higher tax rates than living in a rural county. Areas with well-ranked school districts also tend to have higher taxes. And of course, the more expensive home you buy, the more you’ll pay in taxes. 

How can I lower my property tax bill?

The government sets your property tax rates, but there are a few things you can do to try and reduce your costs.

  • Property tax exemptions: Some areas offer property tax exemptions for certain people. The most common eligible groups include veterans, senior citizens, and individuals with disabilities. This is often called a homestead exemption. 
  • Property tax appeals: You may file an appeal with your tax assessor’s office if you think the assessed value of your home is inaccurate. There may be a window in which you must file your appeal after receiving your assessment, usually between 30 and 90 days. But there’s no guarantee the appeal will be approved, even if you provide information to support your claim (such as local real estate comps). 
  • Property tax deductions: One of the tax benefits of owning a home is a property tax deduction if you itemize your tax returns. However, there is a limit on how much you can deduct, which is $10,000 for joint filers and $5,000 for married filing separately.