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

6-Minute Read
Published on March 3, 2021
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Property taxes have been used to fund government functions for millennia. These government functions can include local and community services, schools, infrastructure and other projects. The price of property taxes can vary from location to location, but it’s generally based on the property’s value. Because all homeowners pay property taxes, it’s important for prospective and new homeowners to understand what property taxes are, how they’re calculated and more.

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What Is Property Tax?

Property tax is a tax paid by an individual or entity on an owned property. Property taxes are a type of “ad-valorem” tax, which means they are 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.

What Is Property Tax Used For?

Whether you realize it or not, property taxes are used to fund many initiatives and services that may affect your daily life, like local governments’ activities, including law enforcement, fire protection, community pools, libraries and other community projects.

These services are what attract some home buyers to desire one particular neighborhood over another. For example, good school districts and safe neighborhoods are two of the many neighborhood amenities that can attract prospective homeowners to a particular neighborhood. But because homeowners in certain neighborhoods can enjoy these services, it’s only fair that the services are all funded by the taxes paid by current homeowners.

If you’re a potential home buyer who’s comparing different neighborhoods with different services offered to community members, make sure to take a hard look at your budget and consider how those property taxes will affect it. This might mean you’ll have to pick and choose what communal benefits are best for you and your family.

How Property Taxes Are Determined

State and local laws determine how property taxes are calculated. Nonetheless, property taxes are evaluated using the property’s value and the city’s tax rate. Let’s talk more about these two factors.

The property’s value takes many factors into consideration, including the physical home, its land and other personal property like cars. This value is determined by an assessor who works with a local taxing authority and keeps track of the local property values. Because a home’s property value is closely monitored, changes in a property can increase or decrease a home’s value.

A home’s tax rate is determined by a local taxing authority and can vary based on a home’s location and property type.

The Role Of Tax Assessors

As we previously mentioned, a tax assessor is responsible for estimating the market value for all property owned within their jurisdiction. When assessors prepare the property tax assessments that are sent to all property owners, they take into account the value of the actual home, its land and other personal property such as cars or boats. The tax assessor may also work with the local taxing authority to keep track of local property values.

The Role Of Local Officials

In addition, local officials are in charge of setting the property tax rate for their municipality. When local officials determine a property tax rate, they take into account a home’s state, county and property type.

How To Calculate Property Tax

If you’re interested in estimating the value of your property taxes yourself, you can follow this formula:

Property Tax =Property Value x Tax Rate

Since there are many factors that go into each portion of this 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 see an estimate to get a feel for where you’re at.

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 someone like a home appraiser. Your tax rate will vary depending on where you live; it is usually decided by your county, city or town.

Here’s an example: Let’s say you live in Chicago, Illinois, and the assessed value of your home is around $280,000. The average tax rate in Chicago (Cook County) is about 2.1%, so how much should you expect to pay in property tax?

Property Tax = ($280,000) x (2.1%)

$5,880 = ($280,000) x (2.1%) 

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

Property Tax FAQs

If you still want to learn more about property taxes and what they require from homeowners, read on to get the answers to all of your questions.

Are Property Taxes And Real Estate Taxes The Same?

Essentially, yes, property taxes and real estate taxes are the same thing. The term “real estate tax” refers to a tax on owned real estate. Real estate tax and property tax can usually be 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 Are Disputes Over Assessments Handled?

If you were to 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. From there, make sure to ask how the assessment was prepared, and then do your own research. We’d suggest looking at comparable property sales or other factors that you believe reflect the true value of your property more accurately.

What Are Property Tax Exemptions?

In some cases, homeowners can qualify for a property tax exemption. Some of the most common property tax exemptions are available for seniors, veterans and homesteaders. These property tax exemptions will reduce, but do not usually eliminate, property taxes.

How Do I Pay My Property Tax Bill? 

Easy enough, most property tax payments are part of the homeowner’s monthly mortgage payment. This is because mortgage servicers collect the excess between what’s owed on the mortgage and what’s paid in an escrow account. This account is then tapped to make the payment when it’s due.

Homeowners can also choose to make annual or semi-annual payments directly to their tax authority when it’s due.

Can I Deduct My Property Taxes From My Federal Taxes?

State and local taxes have traditionally been deductible in full from federal income tax. However, in high-tax states, there were tax changes enacted in 2019 that capped these deductions at $10,000.

What Happens If I Fail To Pay My Property Taxes?

If you fail to pay your property tax bill for some reason, your municipality will place a tax lien on your home. Therefore, it’s very important that as a homeowner, you’re able to afford your property tax payments and stay up to date on them.

When there is a tax lien on your home, the IRS will notify creditors 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 actually seize your property to satisfy the debt.

There are many other consequences for refusing to pay or paying your taxes late. Under some circumstances, the IRS may transfer your account to a private collection company. A private tax collector may use aggressive tactics to get you to pay, so as mentioned earlier, it’s best to avoid failing to pay if possible.

Summary: Property Taxes Are An Ongoing Expense

As you search for a new home, make sure to consider the accompanying property taxes because they will be a continuous expense. It’s crucial that as a homeowner you’re able to afford your home’s bills as well as the property tax payments. To learn more about property taxes and explore new topics, visit the Rocket Mortgage® Learning Center.

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