• Property taxes are recurring taxes levied on real estate and qualified personal property by local governments.
  • Most property taxes are calculated based on the value of the property, so increases in property values typically mean higher property tax bills.
  • Property owners are required to pay their property taxes. Failure to do so could result in penalties, fees, tax liens, or forfeiture of the property.

Whether you’re a homebuyer exploring listings or a homeowner planning a long-term budget, underestimating property taxes can create unnecessary financial stress.

Understanding why property taxes are levied and how they are calculated can help prepare you for this inevitable expense of ownership.

What is Property Tax?

Property tax is a recurring tax levied by local governments on owned properties. This tax applies to:

  • Land: The ground itself, excluding any structures, buildings, or improvements.
  • Improvements: Any structure built on or affixed to the land.
  • Qualified personal property: This varies by jurisdiction but can include vehicles, boats, machinery, and business equipment.
  • Fixtures: Items that have been permanently attached to a structure, such as plumbing, lighting, and HVAC systems.

Property taxes are ad valorem, meaning that they are based on the value of the property, subject to any exemptions and limits on annual increases.

These taxes are used to fund local services and infrastructure, including schools, police and fire departments, public parks, and road maintenance.[1]

In most states, property taxes are administered at the county level.[2]

How Property Taxes Are Calculated

Property tax calculations can vary by jurisdiction, but they usually follow a similar formula:

property tax = (assessed value x tax rate) + direct assessments

What Is an Assessed Value?

The assessed value is typically the local Tax Assessor’s estimation of the property’s current market value. However, many states have limits on the amount the assessed value can increase from one year to the next, resulting in assessed values well below the current market value.

In California, for example, assessed value increases are capped at 2% per year.[3]

In small jurisdictions, the Assessor may value properties individually for tax purposes. In larger jurisdictions, the Assessor may apply a formula to entire regions. For example, a county might calculate current year assessments by trending the prior year’s values up to match the Consumer Price Index growth for the period.[4]

Many jurisdictions also offer exemptions, subtracting a certain amount from the value for tax assessment purposes.

What Is the Tax Rate?

Tax rates are established by jurisdiction, typically changing from one year to the next to meet changing budgetary needs.

These rates typically fall between .25% and 2.5% of the assessed value.[2]

Multiple factors influence property tax rates, including:

  • State and local laws
  • Voter initiatives
  • Local services provided
  • Property type (residential, commercial, industrial, etc.)

What Are Direct Assessments?

Direct assessments are property taxes that are not based on the value of the property.[5] Instead, they could be based on factors like the area of the lot, the size of the structure, or the frontage of the property. Or they could be flat fees charged to every parcel in the region.

Direct assessments are added after the ad valorem tax has been calculated.

Example of Calculating Property Taxes on a Home

Consider a home with a $500,000 assessed value, a 1.5% tax rate, and $500 in direct assessments.

The ad valorem tax would be $7,500 ($500,000 times .015). Adding in the $500 direct assessments, the total tax bill comes to $8,000 for the year.

This amount changes from year to year. For example, assume that the property increases in value to $515,000 the following year, while the tax rate changes to 1.52%, and the direct assessments increase to $600. For this year, the ad valorem tax would be $7,828 ($515,000 times .0152), and the tax bill total would be $8,428 for the year, including the $600 direct assessments.

What Is a Mill Rate?

Instead of using a traditional tax rate, some states, such as Colorado and New York, use a mill rate in property tax calculations.[2]

A mill rate is the amount of tax payable per $1,000 of a property's assessed value. For example, a mill rate of 10 means $10 of tax for every $1,000 of assessed property value. So, if a $500,000 property had a mill rate of 10, the ad valorem tax would be $5,000.

Appealing Inaccurate Property Tax Assessments

If you feel the tax Assessor has over-assessed your home, listing the assessed value higher than the market value, you can appeal the assessment.

In smaller jurisdictions, property owners can contact the Assessor’s office directly to discuss the value. Larger jurisdictions have Assessment Appeals Boards with specific procedures for protesting the assessment. The appeals process often includes filing an appeal application and presenting value information, such as an appraisal or a real estate broker’s opinion of value, to the local appraiser or board.[6]

Property Tax Responsibilities and Payment Obligations

The property owner is ultimately responsible for paying property taxes on time. It is important to confirm that the local tax collector has your correct mailing address on file so you can receive your tax bills.

How Property Taxes Are Paid

When buying a house, property taxes are typically handled at closing. The seller is responsible for paying property taxes up to the closing date, while the buyer covers taxes for the remainder of the tax year. This is usually done through prorated payments in which the buyer reimburses the seller for any prepaid taxes or the seller pays their portion to the buyer so the buyer can make the full payment when it becomes due.

Ongoing annual property taxes are paid differently depending on your area and whether you have a mortgage on the property.

In most states, property tax payments are due annually, bi-annually, or quarterly. If you do not have a mortgage, you may pay the tax collector directly according to the payment instructions on the tax bill.

If you have a mortgage, your lender (or loan servicer) may include a property tax charge in your monthly mortgage statement so they can collect the funds in an escrow account to pay your tax bill when it comes due.

Lenders have a vested interest in making sure borrowers’ property taxes are paid in full and on time because missed payments can affect both lenders and property owners.

Consequences of Missed Payments

Missing a property tax payment often results in fees and penalties. If the account is not brought current, the taxing authority may place a tax lien against the property.[7] A tax lien is a legal claim that secures the government's interest in the property. The lien must be resolved before the owner can sell or refinance the property.

If the bill goes unpaid, the taxing authority can attempt to collect the amount through auction. In tax deed states, the government can auction off the property to the highest bidder. In tax lien states, the government can auction off the lien to the investor that bids the lowest interest rate on the debt. The property owner would then need to repay the investor the amount of the debt plus their interest bid to remove the lien. If the debt is not repaid during the designated timeline, the investor could lawfully seize the property.[8]

In the extreme case of a deed auction or tax lien foreclosure, the owner would lose the property, and the lender would lose the collateral that secures the loan. This is why lenders often insist on paying property taxes on the owner’s behalf.

What Happens to Property Taxes When a Home Sells?

When a home sells, the value assessment may be set to the property’s sales price because the sales price is a reliable indication of the property’s current market value.

This means the property taxes could increase substantially when the property changes ownership. For example, if the seller is paying taxes based on an assessed value of $300,000 (perhaps because of limits to annual increases), but you purchase the house for its current market value of $600,000, the property taxes on the first year of ownership could be double what the seller paid in their last year of ownership.

The Bottom Line

Property taxes can be a sizable expense, so it’s important to factor this cost into your homebuying budget as well as your ongoing household budget as a homeowner. Knowing how to calculate property taxes can help you budget more accurately and be prepared when your property tax bill comes due.

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