Property Tax 101

Posted by Josie Bumgamer on December 3rd, 2020

Understanding How Property Tax Works

When purchasing a new property, whether it be your primary home, vacation home, or an investment, there are monthly costs to consider every time.  The first thing that comes to mind is the home mortgage, which is more than likely going to be the biggest recurring expense on your property.  However, even if you are buying a property in cash, there are still some monthly expenses you need to consider.  There is of course an HOA fee if your home is part of an association, property insurance which is crucial, and debatably one of the most necessary but cringe worthy expenses: property tax. 

While we know that these taxes are used to fund our everyday lives such as the paved roads in the town we live, in the sewage system, the school system, etc, some states and cities can have very high property tax rate or mill rates (will explain this in more detail below) which can really increase your monthly expenses.  One thing is for certain, you can always count on receiving a tax bill for as long as you own that home.

To understand how property tax is calculated, tools on where to find property taxes by address, and just a general understanding of taxes, read ahead!

Property Tax Overview

A property tax rate or millage rate (often called mill rate) is a proportion calculated based on the estimated value of the property, usually levied on real estate. This tax is based on where the property is located which is dictated by the national government, a local state, a county or geographical region or a municipality.  Two different towns within the same county may have different mill rates, just as two different neighborhoods within a city may have property tax rates that are different.

In other words, property tax in the U.S. is collected by local governments and are typically based on the value of a property. This means that as time passes the tax bill will likely increase as your home will be reassessed and (if all goes well) the value of the home will appreciate in value.

What is tax money used for?  In a general sense, these funds support community safety through policing, education through public schools and private charter schools in some areas, infrastructure such as sidewalks and highways and other public projects.  There are tools available which can help you to better understand the average cost of property tax rate in your area.

What Are Property Taxes?

The short version is that property taxes are taxes levied on real estate by governments, usually at the state, county and local level. Fun fact: property taxes are one of the oldest forms of taxation. To put a date to it, the earliest known record of property tax dates to the 6th century B.C. This means that in the U.S., property taxes are older than income taxes!  You may be familiar with some states which don’t levy an income tax, however, all states (even Washington, D.C.) have property taxes.

How Are Property Taxes Calculated?

The is a property tax formula, but before we get into that, one important thing to remember is that your property tax payment is not regulated by the federal government. The property taxes are based on the state and county tax levies for where the property is located.  Lets say you live in Connecticut but own a property in the Bronx, your New York’s property tax bill will be based on the Bronx levy and the value of your Bronx property. 

How much you pay in property tax greatly varies; in some areas of the country, your annual property tax bill may be less than one month’s mortgage payment. In other places, it can be as high as two to three times as much as your monthly mortgage payment.  Since this variability is the hard truth about taxes and something you cannot really control, you’ll want to take this facet of your home search process into account when deciding on where you want to live or what areas you are interested in investing in. A good amount of times, areas with high property taxes also have more to offer such as good public schools and programs, but you’ll just need factor this into your budget.

What Are Property Taxes Used For?

It’s important to understand that no matter how you feel about property tax costs, property taxes are necessary for state and local governments to function. These funds account for most of the revenue needed to support infrastructure, continue public safety and public schools, as well as for the county government itself to function.

In general, the best public schools are typically located in municipalities which would be considered to be on the affluent end of the spectrum.  These areas have high home values and high property taxes. There are some states which provide state funds for county projects, but other states step away and leave the decision making to the counties who then levy and use these collected property taxes fully at their discretion. For this group, funding all county services through property taxes is the only option.

As an example, a breakdown for a town in Connecticut can be as follows:

-          The county takes a cut as do …

-          The local school districts and colleges

-          the library

-          the fire department.

Though this is a specific example, where you live it may be difficult to find the same breakdown of the tax levies. Your bill can oftentimes depend on the budgets for your county, the school district votes, as well as other variable factors that are particularly applicable to where your property is located. 

How Do Property Taxes Work?

This will be a crash course on the main aspects of how property tax works, so lets start off by highlighting some key terms first.

-          "assessment ratio" and

-          “millage rate”

The assessment ratio is the ratio of the home value; this value is determined by an official appraisal which is typically completed by a county assessor as well as the value as determined by the housing market. For example, if the assessed value of your home is 0,000, but the market value is 0,000, then the assessment ratio is 80% (200,000/250,000). You then take the market value of the property and multiply it by the assessment ratio in your area.  This would equal the assessed value of your property for tax purposes.

You may be wondering how and when the county assessor appraises your property.  This depends on the specific county your property is located in, but the most common is for this to happen annually, every five years, or something in between.  There are some states where the assessed value is the same as the current market rate of your property.  The assessor in these situations would do a “market comparison report” which essentially takes the recent sales in your area for a similar property and compares it to your property. Other states may establish that your property’s assessed value is thousands of dollars less than the market value.  By going onto your city’s website and looking up the tax assessor section, you should be able to get an explanation to how property taxes work within that area.  Some towns and cities even have the ability to find property taxes by address so you should be able to pay property tax online login in those cities. You should also be able to visit the local city hall to get more information in person from the government if you would prefer this method over searching online. 

Now lets look at the millage rates. The millage rate is the amount per ,000 of property value that's levied in taxes. The millage rates are expressed in tenths of a penny, meaning one mill is --content--.001. So on that same 0,000 home from the example above, a millage rate of --content--.002 will equal 0 in taxes owed (--content--.002 x 0,000 assessed value = 0). Keep in mind that each school district can have its own millage rate. All of these separate tax levies are added and then applied to your taxable value.

To put it all together, to get the property tax formula for your area, you need to take your property’s assessed value and subtract any applicable exemptions for which you're eligible for and from there you get the taxable value of your property.  That taxable value then gets multiplied by the sum of all applicable millage rates. The number you end up with (millage multiplied by taxable value) tells you the property taxes owed before any credits. Remember that tax credits are different from exemptions and aren’t available everywhere. You have to check with your county to see if there are any credits you are eligible for. These credits are then subtracted from the total taxes you owe. Once you calculate that number, you have your total property tax bill.

…And What Exactly Are Property Tax Exemptions?

You saw we subtly mentioned tax exemptions in the previous section, but this may be the first time you have heard of them.  To shed a bit more light on that, here's a breakdown of some of the most common property tax exemptions:

-          Homestead

o   This exemption safeguards the surviving spouse and protects the value of a home from property taxes and creditors in the event a homeowner dies.  For example, if the state you live in offers a homestead exemption for a homeowner’s primary residence that offers a 50% reduction of the home's taxable value, then that means that if your home was assessed at 0,000, and you qualified for an exemption of 50%, your taxable home value would become ,000. The millage rates would apply to that reduced number, rather than the full assessed value.

-          Persons with disabilities

-          Senior Citizens

-          Veterans/Disabled Veterans

-          Religious or Non-Profit Groups

o   A lot of states and counties include certain property tax exemptions beyond the full exemptions granted to religious or nonprofit groups. These specialized exemptions are usually a reduction of up to 50% of taxable value but the rates can vary.

How you get the exemption can vary as some states offer exemptions automatically without any further action being needed by the homeowner if your property if it is a primary residence. Other states and counties require applications and proof for specific exemptions. You should spend some time researching whether you qualify for any of these exemptions and bake these into your property tax formula as this can save thousands of dollars over the years in property tax rate.

How Do You Pay Your Taxes?

Different cities have their own systems, and oftentimes there is more than one way to pay your taxes.  That said, if you have a condo, single, or multifamily property (up to 4 units) and you purchased the home using a mortgage lender, the tax payments are part of your monthly mortgage payment.  Take a look at your latest mortgage statement: there should be several charges broken down there:

-          Principal

-          Interest

-          Taxes

-          Insurance

This quad of expenses is typically referred to as “PITI” and is frequently set up automatically once you sign your mortgage papers at closing. By paying this amount every month to your mortgage lender, they are able to keep that money in escrow and then pay the government on behalf of the homeowner.  If you do not have a mortgage, chose to opt-out, or have a property which is considered commercial (i.e. 6 unit multi-family) then you have to keep track of when your taxes are due (can be on a monthly, quarterly, semi-annual or annual basis) and pay property tax bill directly to the county government.  As mentioned before, many cities and towns have the ability to pay property tax online login via the tax assessors site where you can find property taxes by address and pay directly online.

To Wrap It All Up

You are the one who decides what kind of tax burden you are ok with and what you aren’t.  If you feel that paying more in taxes will enable your kids to have a better public education then it may be worth it.  Similarly, if you feel that saving money on your annual tax bill due to living in a district that does not do much for public programs is something you are ok with then that is something up to you and your family’s discretion.  In the end, deciding to purchase a home and taking property taxes into account is indeed something you should not bypass.

Just remember that the amount of variance across counties and school districts can be considerable. This is the one recurring expense you can always count on, even when mortgage payments go away. Once you are a senior you may qualify to get a property tax break, but you should make sure that the area you are purchasing your home in has this exemption.  Even if you get it granted, there will still be a tax bill though it won’t be as high so it should always be taken into your budgeting calculations. 

Always remember to do your own thorough research by going straight to your local government’s website or visit in person with any and every question you may have.