What is property tax? Everything homebuyers need to know
Make sure you look into property taxes before you buy your dream house
Property taxes add to the cost of owning a home, and you must pay them each year to maintain ownership of a property. Even after you pay off your mortgage, you'll continue paying property taxes.
Property tax costs vary widely across the country, with some areas levying taxes at a much more affordable rate than others. Before you purchase a home, find out what its property taxes are, how quickly they might increase in the future and what kind of deductions or exemptions you may be eligible for.
Key insights
- Property taxes are taxes levied on real property, including residential and commercial buildings and the land they sit on.
- Property taxes are generally collected by local governments, including counties, municipalities, school districts and townships.
- A range of deductions and exemptions can help homeowners pay less in property taxes if they qualify.
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.
You can find the property taxes charged on a home by checking with your local tax assessor or municipality website.
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 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: 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.
Frequently asked questions (FAQ)
How often do I have to pay property taxes?
While every local government sets its own rules for collecting property taxes, most collect them annually or twice per year. However, if you make a mortgage payment on a loan with an escrow account, your mortgage company likely pays your property taxes on your behalf.
How do I pay my property taxes?
You can pay your property taxes online or in person, usually with your county treasurer's office. Depending on the rules, you can typically pay by check, money order, cash, credit card or debit card.
Do property taxes go down for senior citizens?
Property taxes can be lower for senior citizens who qualify for a deduction or exemption based on their age and location. Check whether your local government offers a property tax break for seniors.
Bottom line
Property taxes are one of the ongoing expenses of homeownership, like maintenance and repairs. Property taxes can be especially high in some areas of the country, so keep them in mind as you shop for a home and calculate how much you'll be paying 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.
Sources
- Urban Institute, “ Property Taxes .” Accessed Jan. 8, 2023.
- National Association of REALTORS, “ Property Taxes .” Accessed Jan. 8, 2023
- Tax Foundation, “ Unpacking the State and Local Tax Toolkit: Sources of State and Local Tax Collections (FY 2020) .” Accessed Jan. 8, 2023.
- Arkansas Assessment Coordination Division, “ Three Approaches to Value .” Accessed Jan. 8, 2023.
- Indy.gov, “ Apply for Over 65 Property Tax Deductions .” Accessed Jan. 8, 2023.
- Lake County, Illinois, Assessment Office, “ Homestead Exemption for Persons with Disabilities (HEPD) .” Accessed Jan. 8, 2023.
- IRS, “ Publication 936 (2022), Home Mortgage Interest Deduction .” Accessed Jan. 8, 2023.
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