How to Calculate Property Tax?
What is property tax?
Buying and owning a home has many fees and your property tax is just one that you need to keep in mind. Property taxes are levies charged by your local government to fund local public services like schools and emergency services. They are automatically calculated by your local government, but estimating it yourself could help you catch any mistakes made by your tax assessor.
How to Calculate Property Tax?
To calculate your property tax, you will need to first get two key numbers: the assessed property value and the mill levy. With these two numbers, you can easily get an estimate for your property tax, but the accuracy of your calculation will depend on how accurate your inputs are.
Assessed Property Value
You may often hear people talk about the market value of a property, but this is not the same as the assessed property value. The market value of a home is the amount an informed buyer would pay for a property. This is the value of your property according to the broader real estate market. However, the assessed property value is the value of your property determined by your local tax municipality.
Tax assessors will evaluate your property as often as once per year and adjust their property value estimate when it is sold, bought, built, or renovated. This value is based on the property size, different rooms, the purchase price, the neighborhood, and several other factors. While your assessed property value is usually close to the fair market value, if you are in a seller’s or buyer’s market, this value will be adjusted to reflect more balanced market conditions. However, the assessed property value will generally be lower than the market value.
If you are eligible for any deductions or exemptions, you can subtract this amount from your assessed property value and enter it in the calculator. Certain counties will only apply the property tax to a portion of the assessed property value.
Each local tax assessor’s office or local tax authority will have your property tax information available including your assessed property value on the Public Records Online Directory. If you disagree with your assessed property value, you can submit an appeal with proof that the assessed value is inaccurate to your local tax assessor.
Mill Levy (Millage Rate)
Your county’s mill levy is how much you need to pay per $1,000 of your assessed property value. A county with a mill levy of $20 would have a property tax rate of $20/$1,000=2%. The average mill levy in the U.S. is $11 or 1.1%. This tax rate can vary significantly depending on government services and their required revenue. For example, a county with several schools and hospitals is likely to have a higher property tax than a county without them.
The mill levy is applied annually, so a mill levy of $20 on a $300,000 home would cost $6,000 per year. However, you will probably receive your property tax bill on a semi-annual basis for half of the annual levy. Using the same example, you would pay $3,000 every 6 months, but the total annual property tax is still $6,000. Generally, property taxes are paid on March 1st and September 1st.
Map of Mill Levy Across All 50 States
When are property taxes due and how often do you pay them?
If property taxes are included in your mortgage payments, as long as you make your mortgage payments on time, you won’t have to worry about paying property taxes online.
If you choose to pay property taxes yourself, you will have to make periodic payments throughout the year. Depending on where you live, you may be able to choose between paying your property taxes monthly, quarterly, or semiannually. Each payment is used to cover your property taxes for the following months until your next payment. If you choose to pay property taxes semiannually, you should generally expect to make payments on March 1st and September 1st, but this varies. Your March payment will be used to pay for property taxes from March to August and your September payment will be used to pay for September to February.
If you choose to make your property tax payments early, you can get early payment discounts of as much as 4%. That’s why you should always try to make your property tax payments as soon as you get your bill.
Property Tax Exemptions
If you think you might qualify for any property tax exemptions, you should check for yourself. No government agencies will voluntarily inform you that you are exempt from paying these taxes because the responsibility is on you.
- Homestead Exemption: There are a number of homestead exemptions that allow homeowners to not pay property taxes. One homestead exemption protects homeowners from paying property taxes when their spouse dies. Homestead exemptions vary by state, but can include homeowners above certain ages, those with low incomes, and homeowners with disabilities. There may be restrictions attached to this exemption, so it’s important to read the fine print.
- Veterans: There are property tax exemptions for veterans if they use the home as their primary residence, served during wartime, and were honorably discharged. Depending on the state, peacetime veterans may qualify or only disabled veterans may qualify. Income limits and residency lengths may also vary by state.
- Home Renovations: If you renovate your home or make home improvements, you may not have to pay property taxes on the added value to your property. This includes installing renewable energy systems like solar panels or geothermal heating. However, you will still have to pay property taxes on the original home value.
If you do not qualify for the above exemptions, you should still check with your local tax assessor’s office. There may be exemptions that you do not expect and you could save thousands of dollars per year.
- Government properties are exempt from paying property taxes because the revenue generated from property taxes is used to fund public government services like schools
- Non-profit hospitals that provide free or low cost health care are exempt from paying property taxes
While there are several property types that are exempt, most residential properties are subject to property taxes.
How to pay property taxes?
There are two ways to pay your property taxes:
- Adding to your monthly mortgage payment: Many lenders will roll property taxes into your monthly mortgage payment. Lenders calculate your monthly property tax payment by taking your annual property tax and dividing it by 12. Generally, mortgage payments will include principal, interest, mortgage insurance, and the property tax. These four components of your monthly mortgage payment are known as PITI (principal, interest, taxes, and insurance). You can find your property tax paid in box 10, labelled “Other”, of your IRS mortgage interest statement (Form 1098).
- Paying the tax directly to the tax office: If your property taxes aren’t included in your monthly mortgage payments, you will receive a property tax bill in the mail. This will be sent to you twice a year.
Where to pay property taxes: If your property tax is included in your monthly mortgage payment, your lender will take care of property tax payments. Your property tax payments will be put into an escrow account used to pay the bill when appropriate and some lenders require you to have this. If you are allowed and decide to cancel this escrow account, you will have to pay property taxes yourself. Your property tax bill should include payment directions. Generally, you should be able to pay by:
- Sending money or a check through the mail
- Paying online with a credit or debit card
- Paying online with an eCheck (electronic check)
- Paying over the phone with a credit or debit card
Real Estate Tax vs Property Tax
Real estate taxes are just another word for property taxes. They are interchangeable terms used by realtors and real estate investors.
Some confusion may arise with the differences between personal property tax and real estate taxes. Personal property tax is a tax levied by state and local governments on personal property, which includes everything other than real estate. Personal property encompasses any assets that can be physically moved.
What do property taxes pay for?
Property taxes are a source of revenue for state and local governments who use it to fund public services like schools, hospitals, or emergency services. They are the largest source of revenue for state and local governments in the US. Each year, state and local governments have a target budget. By using current real estate data, they can calculate the necessary mill levy to achieve their budget goals. Generally, property taxes pay for the following items:
- Schools: Public schools take the largest share of property tax revenue. However, some states are shifting towards using state-levied taxes rather than local property taxes.
- Public Safety: Emergency services like police officers, firefighters, and emergency medical technicians (EMTs) are all funded by property taxes. Public safety includes any public safety workers and legal liabilities associated with public safety.
- Parks and Recreation: Public parks, recreational facilities, and public trails are funded by property taxes.
- Public Roads: Each municipality needs to regularly construct and maintain streets. This is a key part of city infrastructure and requires quite a bit of funding to keep them safe and functional.
- Sanitation: Cities need to ensure that streets remain clean and trash is collected. Sanitation fees may appear separately on a tax bill or as part of property taxes, but they are only charged to homeowners.
What states don’t have property taxes?
Every state charges property taxes. Property taxes are an essential part of government funding used for essential public services like schools, emergency services, libraries, etc. With that being said, different states and counties charge different property taxes. Here are the 5 states with the lowest property taxes:
- Louisiana - 0.18%
- Hawaii - 0.26%
- Alabama - 0.33%
- Delaware - 0.43%
- West Virginia - 0.49%
Can you write off property taxes?
If you itemize your tax deductions, you can deduct any property taxes paid on both real estate and personal property. The only exception is if you agree to pay the previous homeowner’s delinquent taxes from previous years. This is instead treated as a cost included in the home purchase. The maximum eligible deduction of state and local income, sales, and property taxes from your federal taxes is a combined $10,000 ($5,000 is married filing separately).