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Property Tax: What It Is, What It Does And How It’s Calculated

5-Minute Read
Published on May 3, 2021

Property tax is an assessed fee based on the value of a property. And it is just one of many expenses that must be accounted for if you own property.

All homeowners pay property taxes, so it’s critical that new homeowners understand how property taxes work.

Let’s take a closer look at what property taxes are, how to calculate them and how property taxes can ultimately help you decide where to live and how much house you can afford.

What Is Property Tax?

An individual or entity pays property tax on an owned property. Property tax – which is an ad valorem tax – is based on the assessed value of real property and some tangible personal property, such as boats or cars.

In the U.S., these taxes are generally levied by state and local municipalities and used to fund school districts, community amenities and other local expenses and projects. Property taxes can vary widely between states and even adjacent municipalities.

How Does Property Tax Work?

Property taxes are calculated using the property’s value and the city’s tax rate. Many factors can affect a property's value, including the physical home and the land it sits on.

A tax assessor estimates the market value of all the owned property within their jurisdiction. Assessors prepare property tax assessments for property owners to determine how much they will pay in property taxes.

In addition to tax assessors, local officials oversee and set the property tax rate for their municipalities. When local officials determine a local property tax rate, they consider the property type along with the county and state property tax where the property is located.

Because a home’s property value is closely monitored, changes to a property can cause a property tax increase or decrease.

Property Taxes Vs. Real Estate Taxes: What’s The Difference?

Essentially, property taxes and real estate taxes are the same things. The term “real estate tax” refers to the tax on owned real estate. Real estate tax and property tax are usually used interchangeably unless you are talking about personal property tax. Personal property tax includes movable assets, like cars, boats and planes, but excludes homes or real estate.

How To Calculate Property Tax

If you’re interested in estimating your property taxes, follow this formula:

Assessed Value × Tax Rate = Property Tax

Since many factors go into each variable of the equation, the answer you come up with will only be an estimate and may not mirror how much you actually end up paying in property taxes – but it can be good to calculate an estimate to get a feel for your potential tax bill.

The property value in this equation is the assessed value of your home. Your assessed value can be estimated by looking at comparative properties or calculated by a home assessor. Tax rates vary depending on where you live. They’re usually decided by your county, city or town.

It’s important to note that the property’s assessed value won’t necessarily match its appraised value. And many states have laws that limit assessed value to a percentage of a property’s appraised fair market value.

Calculating Property Tax: An Example

If you live in Chicago, Illinois, and the assessed value of your home is around $280,000, the average tax rate in Chicago’s Cook County is about 2.1%. How much should you expect to pay in property tax?

($280,000) × (2.1%) = Property Tax

($280,000) × (2.1%) = $5,880

According to the example, you could expect to pay about $5,880 annually. If you’d like to try the formula, find your city or county’s average tax rate online. Also, many online property tax calculators can find that information for you.

Before you start your house hunt, estimating property taxes for the neighborhoods you’re interested in may help narrow your search, leaving you free to focus on homes that won’t break your heart – or your wallet. Getting approved for a mortgage can show you what you can afford and show home sellers that you’re a serious and confident buyer.

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What Is Property Tax Used For?

Whether you realize it or not, property taxes fund many initiatives and services that affect your daily life, including local government initiatives, such as law enforcement, fire protection, community pools, libraries, city road work and other community projects.

In addition to community amenities, many prospective buyers will research good school districts and the safety of neighborhoods in pursuit of finding the right neighborhood to call home.

If you’re a potential home buyer and you’re comparing different neighborhoods with different or better services, take a hard look at your budget and consider how property taxes will affect your ability to afford living there.

How To Pay Your Property Tax

Most property tax payments are part of a homeowner’s monthly mortgage payment, making them easier to pay. Mortgage servicers collect the tax payment from your monthly mortgage payment and deposit it into an escrow account. The escrow account gets tapped whenever a payment is due.

Homeowners can also make annual or semiannual payments directly to their tax authority when they’re due. Mortgage lenders may put restrictions on this option so they can be reasonably certain your home won’t be seized in a tax foreclosure.

For example, Rocket Mortgage® requires at least 10% equity in a home before removing escrow on a VA loan and 20% equity for conventional loans. However, escrow accounts are always required for FHA and USDA loans.

Property Tax FAQs

To learn more about property taxes , read on for answers to all your questions.

How are disputes over assessments handled?

If you disagree with your property tax assessment, there’s a process to appeal it. This process varies according to applicable law. If you’re a homeowner interested in appealing your property tax assessment, start by contacting the assessor’s office.

Ask how the assessment was prepared and then do your research. We’d suggest looking at comparable property sales or other factors you believe reflect the value of the property more accurately.

What is my property tax rate?

Property tax rates vary across jurisdictions, so check with your local taxing authority for your tax rate. You may need to look up your property’s tax rate by your address. To find your county’s tax collection agency, use the Public Records Online Directory and search by ZIP code.

What are property tax exemptions?

In some cases, homeowners can qualify for a property tax exemption, which is just one way taxpayers can lower their property taxes. Some of the most common property tax exemptions are available to seniors, veterans and homesteaders. These property tax exemptions reduce, but don't usually eliminate, property taxes.

Can I deduct my property taxes from my federal taxes?

State and local taxes have traditionally been fully deductible from federal income tax. However, tax changes enacted in 2017 capped deductions at $10,000, which could affect property owners in high-tax states.

What happens if I fail to pay my property taxes?

If you fail to pay your property tax bill, your municipality will place a tax lien on your home. That’s why it’s critical to make your property tax payments and stay up to date on them.

When there is a tax lien on your home, your creditors will be notified that the government has legal rights to your home. If you still fail to pay after this, the tax lien can become a levy, which means the government can seize your property to satisfy the debt. In some cases, your property taxes may be taken out of the profits from the sale.

There are many other consequences for refusing to pay or paying your taxes late. Under some circumstances, the taxing authority may transfer your account to a private collection company. A private tax collector may use aggressive tactics to get you to pay, so it’s best to pay your property taxes.

The Bottom Line: Property Taxes Are An Ongoing Expense

As you search for a new home, consider the impact of property taxes because they will be a continual expense. It’s crucial that you can afford your home’s bills and its property tax payments.

To get started with finding a property and applying for a loan in your price range, start the mortgage approval process today.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.