What Is Property Tax? Everything Homebuyers Need to Know

What is property tax?

Property taxes are taxes levied on real property, including residential and commercial buildings and the land they sit on. People in all 50 states and Washington, D.C., pay property taxes, although local governments rather than states generally levy this tax.

The more expensive your home is, the higher your property taxes are. That’s because these taxes are based on a property’s assessed, or fair market, value. Because tax rates vary dramatically around the country, the same home might have a much higher or lower property tax bill depending on its location.

What do property taxes pay for?

Property taxes fund a range of projects for the common good. They can be used to pay for:

• Sewer and water line repairs
• Road repair projects
• Park maintenance
• New schools and libraries
• Maintenance of schools, libraries and other public buildings
• Public safety, including funding for fire and police departments

Who levies property taxes?

Property taxes are generally levied by local governments, such as counties, municipalities, school districts and townships.

Property taxes make up a large percentage of taxes collected by local governments overall. According to the Tax Foundation, property taxes made up 72.2% of local tax revenue during the fiscal year 2020, compared with 1.8% of state collections.

How are property taxes calculated?

Property taxes are typically calculated based on a "millage rate," with a mill working out to one-thousandth of a dollar. The property’s fair market value is multiplied by the number of mills levied to determine the property tax.

Local governments assess a property’s fair market value using one of three methods:

• Cost approach: With this approach, local governments take the cost of the land plus the cost of improvements minus any depreciation to reach an assessed value. This approach aims to ensure the real estate user doesn’t pay more for the property than it would cost to build an equivalent home from the ground up.
• Sales comparison: This approach uses the sales prices of comparable properties sold recently to assess a property’s fair market value. This approach considers the features and amenities of a property that affect its value.
• Income approach: This approach is typically used to assess the value of income-producing properties, including commercial properties, apartments and hotels. It considers a property’s net or gross income after accounting for potential vacancies and allowable expenses.

Property tax payment schedules and deadlines

The deadlines for paying property taxes differ by state, and may differ by property use. In Maryland, for example, state legislation allows homeowners whose primary residence is in the state to pay that property tax semiannually. Be sure you understand when property taxes are due where you’re looking to buy, as well as the penalties for a late payment.

What happens if you miss a payment?

If you miss your property tax payment deadline, you could see interest added to your base tax amount. In Davidson County, Tennessee, for example, monthly interest of 1.5% is added to the base tax amount each month if you miss the property tax deadline, adding up to 18% per year in interest.

Your local treasurer’s office can take legal action to collect delinquent property taxes, including asset seizure and bank liens, so it’s important to pay your taxes.

How to research local property tax laws

Property tax rates vary dramatically across the U.S., so it’s crucial that you collect information at the local level to get an idea of how much you’d pay in property taxes there.

You can find the property taxes charged on a home by checking with your local tax assessor or municipality website. You should also check with this office to learn when property taxes are due each year and acceptable forms of payment.

According to the Tax Foundation, some counties, parishes and county equivalents in Alabama, Alaska, Louisiana and South Dakota have median property taxes of less than $250 per year. On the flip side, some counties and county equivalents in California, New Jersey, New York and Virginia have median property tax bills of more than $10,000.

Your state comptroller’s office or assessment and taxation department may offer a breakdown of municipal taxes on its website as well. You can also contact this office to see if there are any statewide credits or property tax exemptions, such as a homestead exemption, for which you may qualify.

If you’re working with a local real estate agent, they should also be knowledgeable about property taxes in the area.

Property tax exemptions and deductions

According to real estate investor Mike Qiu of Good As Sold Home Buyers, several tax exemptions and deductions may be available to you depending on where you live, your age and other factors. These exemptions and deductions can help reduce how much property tax you must pay, potentially saving you a significant amount of money.

Some examples of tax deductions and exemptions available to homeowners include:

• Homestead exemptions: Many states offer homestead exemptions to provide tax relief to homeowners. "These exemptions can exempt a portion of the value of a home from property tax, reducing the amount of tax that the homeowner must pay," Qiu said.
• Senior citizen exemptions: Some states offer property tax exemptions or reductions for seniors, which can help lower the burden of property tax on older homeowners. In Indiana, for example, homeowners 65 and older can qualify for a reduction in the assessed value of their home or limits on how much their property taxes can increase each year.
• Disability exemptions: Some states offer property tax exemptions or reductions for disabled homeowners. For example, in Lake County, Illinois, homeowners with certain disabilities can qualify for a $2,000 reduction in their property’s assessed value.
• Veterans exemptions: The majority of states offer property tax exemptions or reductions for veterans or their surviving spouses. The amount of this benefit and who qualifies varies from state to state.
• Mortgage interest deduction: Homeowners can deduct home mortgage interest on the first $750,000 in mortgage debt ($375,000 if married filing separately) each year for newer home loans, or up to $1 million in mortgage debt ($500,000 if married filing separately) for mortgages taken out before Dec. 16, 2017. Homeowners must itemize on their tax return instead of taking the standard deduction for this tax break to apply.

Bottom line

Property taxes are an ongoing expense of homeownership, like maintenance and repairs. Property taxes can be especially high in some areas of the country, so keep that in mind as you shop for a home and calculate how much you'd pay for housing each month.

You may qualify for some exemptions and deductions that could lower the amount of property taxes you pay each year. By understanding how taxes are levied where you live and whether you qualify for a break, you can make an informed decision before you purchase your next home.