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Property tax: How to calculate and pay what you owe

Yahoo Personal Finance· Getty Images
Updated 5 min read

When shopping for a house, first-time home buyers sometimes forget to include property taxes in their mental budget. Property taxes are generally levied by the local government rather than the state government, which means property tax rates can vary greatly across a state.

Understanding how property tax rates are calculated and affect your housing costs can help you make better decisions when buying a house. Here’s what you need to know about property tax.

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There are two types of property tax:

  • Real property tax: This is a tax on real estate, including both commercial and residential land and buildings. You’ll also hear this referred to as “real estate tax.”

  • Personal property tax: This is a tax on movable property, such as boats or furniture.

While some people use these terms interchangeably, it’s important to remember that personal property tax is usually levied by the state government, while real property tax is levied by the local government.

Local governments and municipalities use property taxes to pay for taxpayer services, such as public schools, local fire and police departments, roads and infrastructure, and other important community needs. When people refer to property taxes on their homes, they’re referring to real property taxes (or real estate taxes), which are typically lumped into their monthly mortgage payments. In this article, we are referring to real property taxes on your personal home.

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While the specific tax rates for property taxes vary from place to place, all property taxes are based on the assessed value of the real estate being taxed. This is why local governments regularly assess the property values in their jurisdiction — as often as once per year.

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Your local tax assessors determine the value of your home based on various factors. In some jurisdictions, tax assessors set a value based on how much the home would sell for if placed on the market, while in others, the assessment is based on previous sale prices or the size and attributes of the property.

The assessment is just the first step in calculating how much property tax you owe. Depending on where you live, you may owe property taxes on the entire assessed value of your home, or you might only have to pay taxes on a portion or fraction of the property’s assessed value. For example, if your local government only considers 30% of your property’s value to be taxable, you will only pay taxes on that portion.

If you believe the assessed value of your property is higher than the actual value, you have the right to contest the tax assessment. If the tax assessor has made a mistake or overvalued your home, you will be charged a higher property tax since your taxes are based on the assessed value. You can file an appeal with your local government. In many jurisdictions, there is a specific appeals form and process you must follow.

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In most places, property tax is expressed as a millage rate, which is the amount you pay per $1,000 of value in your home. For example, a $0.001 mill rate means you pay $1 for every $1,000 of value.

Let’s say you have a home with an assessed value of $400,000, and your local municipality assesses taxes on 50% of the value. That means you will owe taxes on $200,000. If the local mill rate is $0.015 ($15 per $1,000 of value), you will owe $3,000 in yearly taxes.

$200,000 x $0.015 = $3,000

However, you may not owe the full $3,000 if you qualify for property tax exemptions.

Learn more: Biden proposes tax credit for first-time home buyers. Here's how it works.

Many local governments offer exemptions to homeowners to help them afford their property taxes. Qualifying for these exemptions could significantly reduce the amount you owe. The most common exemptions include:

  • Homestead exemption: Homeowners who live full-time on their property may be eligible for this exemption. It is generally expressed as a dollar amount that is exempt from taxation. A $50,000 homestead exemption could reduce the taxable value of a $200,000 home to $150,000.

  • Senior citizen exemption: Since homeowners age 65 and older are more likely to live on a fixed income, property tax increases can seriously impact their budget and ability to afford their home. Many local governments offer senior citizen property tax exemptions. These exemptions can take a variety of forms. Some freeze the home’s value at a specific amount so taxes do not rise. Others offer a tax deduction, lowering your tax burden dollar for dollar. And some offer an exemption of a portion of the property value from taxation, similar to the homestead exemption.

Note: It’s common for local governments to give senior tax exemptions for people aged 65 and over, but there are exceptions. For example, the entire state of Washington offers this exemption to homeowners once they reach age 61.

Read more: How the mortgage interest tax deduction works

Most homeowners pay their property taxes monthly as part of their regular mortgage payments. Your lender will generally require you to make a monthly mortgage payment that includes not only your principal and mortgage interest but also an additional amount that goes toward property taxes, homeowners insurance, and mortgage insurance. (To remember what goes into your mortgage payment, just use the acronym PITI: principal, interest, taxes, and insurance.)

The monthly payment for taxes and insurance goes into an escrow account, which your lender uses to pay for these expenses on your behalf when they come due.

For example, if your lender estimates that your property taxes will be $3,000 annually, you will be required to pay an additional $250 per month ($3,000 / 12 = $250), which goes into escrow for your tax bill. If your homeowners insurance is another $1,200 per year, your lender will require you to pay an additional $100 monthly.

However, once you have paid off your mortgage, your mortgage lender will no longer pay your tax bill. At that point, you must pay your tax bill directly to your local government’s tax office. This may be a quarterly, bi-annual, or annual tax bill.