What is property tax and how to calculate it

Property taxes are just one type of tax that homeowners have to pay, but they’re an important one. This tax is based on the value of your property and the tax rate set by the local government. The amount you pay in property taxes funds local governments and pays for things such as garbage collection, emergency services, and public recreation.

Understanding how property taxes work and how they’re calculated can help you get a sense for the true cost of homeownership.

Property tax: The basics

Owners of real property pay property tax.  Property taxes are taxes paid to local governments, giving them the funding they need to pay for services such as firefighters and police, garbage collection, recreation, parks, road maintenance, and more.

The amount each property owner pays is usually determined based on the value of their property, the tax rate of the county, city, or state that they live in, and any features of structures on the property. If you compare property taxes state by state, you’ll find the amount can vary quite a bit.

Generally, that means that people who own more valuable property will pay more for property taxes than those who own less valuable property.

Who pays property taxes?

Owners of real property often pay property taxes through an escrow account. If a property owner decides to pay their property taxes through an escrow account, they will pay a portion of their yearly property taxes along with their mortgage principal and interest each month. When your property taxes are due, they are automatically paid from the escrow account. You can opt out of putting your taxes in escrow each month and just pay them on your own, but many homeowners don’t go this route.

If you don’t pay the taxes on your property, you will face serious penalities. Nonpayment may result in interest being charged on the unpaid balance, possible damage to your credit, a lien being placed on the property, or, in some states, you may be subject to a tax deed auction in which the government forecloses on the property and sells it to recover back taxes.

When do you pay property taxes?

How and when you pay property taxes can depend on a few factors.

The payment schedule for property taxes can vary by state or even municipality and county. Some bill these taxes annually, semi-annually, or quarterly.

If you have a mortgage, many lenders may have you pay for property taxes through an escrow account. That means that the lender will include a portion of your property taxes in your monthly mortgage bill and place that money into a separate account. When the bill comes, the lender will take money from the escrow account to pay the property tax bill.

This can be helpful for homeowners because it means you pay for property taxes over time and predictably, rather than getting a large bill every few months.

Keep in mind that once you pay off your mortgage, you’re responsible for paying property taxes on your own. Your lender won’t keep sending you a bill and holding money in escrow on your behalf.

How to calculate property taxes

The amount you pay for property tax relies on two main factors: the assessed value of your property and the property tax rate in your area. You can calculate the annual property tax bill by multiplying the assessed value of your home by the property tax rate in your area.

To put it in mathematical terms, the formula is:

 (Assessed value) x (property tax rate) = annual property tax bill.

Tax rates can vary significantly from place to place and play a big role in how affordable a home is. You can use the Rocket Mortgage® home affordability calculator to get an estimate of how much you may pay based on the ZIP code you want to buy in.

1. Determine the assessed value of the property

Your first step is to determine the assessed value of your property before multiplying it by the local tax rate. To do this, go to your local municipality’s online tax resource and look up your property. A tax assessor from your city has created an assessed value based on your home’s size, recent sales in the area, the state of the local real estate market, and other factors.

Your assessed value isn’t going to be the same as your appraised value or market value. The assessor is only going to determine the taxable value. This is based on something called an assessment ratio. This is the percentage or amount of a property’s market value that’s used to calculate its assessed value for property taxes. For example, if your home’s market value is $400,000 and your local government taxes 50% of the value, the assessed value would be $200,000.

2. Deduct qualifying exemptions

Some local governments offer tax exemptions for those that qualify that reduce the value of your home when it comes to calculating your property tax.

You may qualify for one or more of these common property tax exemptions.

• Homestead exemptions: A homestead exemption provides tax relief for people who live in their property most of the time. Vacation homes or investment properties don’t qualify for this.
• Senior citizen exemptions: Many places offer tax relief to seniors who live in their primary residence on a fixed income.
• Homeowners with disabilities exemptions: If you have a disability, there may be tax deductions that can make your property taxes more affordable. In some cases, you may be exempt from paying any property taxes at all.
• Veteran exemptions: Military veterans and active-duty service members can also qualify for property tax relief, depending on where they live.
• Agricultural exemptions: If you’re using your property for agricultural purposes, your local government might offer some property tax relief.

You can check with your local government for a list of exemptions offered and for help determining if you qualify.

3. Apply your municipality’s millage rate

Property tax rates are usually expressed as a millage rate, sometimes also called a mill rate. This is how much you pay per $1,000 in property value.

For example, if your city has a millage rate of $13.27, that means you’ll pay $13.27 for every $1,000 in assessed value of your property.

An example of calculating property taxes

This is an example for educational purposes. If we use the millage rate of $13.27 from above and your home is worth $515,000, you’ll pay a total of:

$13.27 x  515 = $6,834.05 per year

If your mortgage lender holds property tax payments in escrow, that means your property tax will add $569.50 to your monthly bill.

Can you deduct property taxes on your tax return?

Yes, many taxpayers can deduct property taxes on their tax return. The rules are different everywhere and often change, though, so consult a tax professional before deducting property taxes on your tax return.

The bottom line: Calculating your property taxes isn’t complicated

While few people get excited about paying taxes, property taxes are essential for keeping local governments running and providing the essential services that you use every day. Calculating your property taxes isn’t too difficult, but it’s important to do if you want to get a full sense of the cost of owning a home.

Property taxes are just one piece of the puzzle that affects monthly homeowner expenses. If you’re considering buying a home, you can reach out to Rocket Mortgage® to see what you qualify for.