What is property tax and how is it calculated?

Quick insights

• Property taxes are a tax on the value of your property and typically cover local community services such as public schools. Property taxes are an ongoing expense for homeowners, even after you mortgage has been paid off.
  
• Property taxes can be paid through an escrow account as part of your monthly mortgage payment or directly to your local tax collector. You may have the opportunity to file for property tax deductions during tax season.
• Real estate taxes specifically refer to taxes assessed on real property, which includes land and any structures on it. Property taxes apply to other types of personal property as well, such as a car or a boat.

Property taxes impact how much money you spend annually on your home and, potentially, how much home you can afford. You’ll be paying property taxes on a yearly basis or at other intervals during the year, and you may pay them from your escrow account as part of your mortgage payments. You’ll also continue paying taxes even after your mortgage is paid off. Let’s take a deeper look at how property taxes are calculated and what they mean for homeownership.

What is property tax?

There are various taxes imposed at federal, state and local levels to help cover services the government provides. Property tax is essentially a tax on the value of your property, typically on a local level. More specifically, property taxes are levied on homeowners to cover local community services like garbage pickup, public schools, police, fire departments and more.

Property taxes vs. real estate taxes

Property taxes and real estates taxes are often used interchangeably, but they both have nuanced differences depending on the context.

• Property taxes includes taxes assessed on various types of property including real estate, personal property (like your car or business equipment), and sometimes intangible property. In most cases, property taxes primarily refers to taxes on real estate.
  
• Real estate taxes refer to taxes assessed on real property, which includes land and any structures on it. Real estate taxes are typically taxed by local governments and are often based on the assessed value of your property.

How does property tax work?

Before purchasing a home, assessing a property’s tax can be helpful in figuring out how much home you can afford. Property taxes are paid on a yearly basis, or at other intervals during the year. They are typically taken from your escrow account, if your account is escrowed. But even after paying off your mortgage, you’ll still be paying property taxes for as long as you own the property. This detail may be worth considering if you’re looking for lower monthly payments in the long term.

Overall, to get a clear picture of your monthly expenses as a homeowner, it may be beneficial to project your mortgage payments, which usually includes property tax, and consider that number when you’re done paying off your mortgage as well.

How to calculate property tax

The way property taxes are calculated may vary depending on your local government. They are typically calculated using the property’s assessed value and the combined tax rates (millage rate) from the surrounding districts. You can determine your millage rate and any exemptions by contacting the local taxing authority. You can generally expect to pay a small percentage of your home's market value per year.

The property tax formula

Assessing your property value using the property tax formula can help you understand how much you should expect to pay in property taxes. To understand the property tax formula fully, you should consider its parts in context. 

Property tax levied on property = (mill rate x taxable property value) ÷ 1,000 

The mill rate is the amount of tax payable per dollar of a property’s assessed value. 

Different mill rates are charged by different agencies, including the township/city, the county, school boards and/or emergency services districts. Multiple mill rates are then combined to get a final rate, which is used to calculate your property tax bill. The taxable or assessed property value is assigned by a government assessor. Each tax region has different procedures for calculating assessed or taxable property value. However, the basic standards are primarily the same. Assessed value determines the value of a residence for tax purposes and takes comparable home sales and inspections into consideration. 

How to pay property tax

Property taxes are paid to the local government and some taxes may be collected quarterly, bi-annually or annually, depending on your county and state. There are two options to pay your property taxes. 

The first option is to pay your property taxes as a part of your monthly mortgage payment, through an escrow account set up by your lender. The lender then pays the property tax on your behalf at the end of the year (or whenever due). In this case, the property tax is added to your monthly mortgage payment. However, you should note these are two separate expenses. The other option is to pay the property taxes directly to your local tax collector.

There are several ways to pay your property taxes. Depending on your local county’s treasurer office, you may be able to make online payments using a credit/debit card, send a check or money order via mail, or either. Additionally, homeowners may also be able to pay online with an electronic check or via telephone using a credit/debit card.

Property tax deductions

While property taxes can constitute a large expense for many homeowners, there are opportunities to file for property tax deductions during tax season. There are standard tax deductions available to most homeowners, and itemized deductions may result in higher savings in some cases. These deductions, meant to incentivize homeownership, can reduce your tax bill by thousands of dollars. Consulting a tax professional can be helpful when figuring out how and what to file as a homeowner.

In summary

Property taxes help cover local government services and are a part of homeownership, even after paying off a mortgage. As a homebuyer, factoring property taxes into your calculation is key when figuring out how much home you can afford. Consider consulting a tax professional for further information on property taxes and potential deductions.