What Is Property Tax and How Is It Calculated?

Property taxes are an annual financial obligation for owners of real estate. These taxes are levied by local governments and serve as a funding mechanism for community services such as public schools, police and fire departments, and local infrastructure. The revenue generated from these taxes ensures that the costs of shared local services are distributed among property owners within a jurisdiction.

The Basis of Property Taxation

Property tax is a local tax not imposed by the federal government. The authority to levy these taxes rests with local government entities like counties, cities, and townships. Specialized districts, such as school, water, and fire protection districts, also have the power to tax properties within their boundaries to fund specific services.

The tax is primarily applied to “real property,” which includes land and any permanent structures attached to it, such as houses, commercial buildings, and other improvements. While real property is the main focus, some jurisdictions also tax “personal property,” which can include movable assets like business equipment or vehicles.

How Property Tax is Calculated

The calculation of a property tax bill involves multiple steps. The final tax amount is determined by multiplying the property’s assessed value by the local tax rate. This process distributes the tax burden based on property value and the budget needs of local governments.

Determining Assessed Value

The process begins with a local property assessor, an official responsible for determining the value of all properties within a jurisdiction for tax purposes. This “assessed value” is related to the property’s “fair market value”—the price it would likely sell for on the open market. Assessors use mass appraisal techniques, analyzing recent sales of comparable properties, considering a home’s specific characteristics like size and condition, and conducting periodic reassessments.

The assessed value is not always the same as the market value. Many jurisdictions use an assessment ratio, taxing only a percentage of the market value. For example, if a home’s market value is $300,000 and the assessment ratio is 80%, the assessed value for tax purposes would be $240,000.

Understanding the Tax Rate

The second part of the equation is the tax rate, set annually by local governments and expressed as a “mill levy” or “millage rate.” One mill represents one dollar of tax for every $1,000 of assessed value.

The final tax rate is a composite of the individual rates set by all taxing authorities serving the property. The county, city, school district, and any special districts each determine their own budget and the tax rate needed to fund it. These individual rates are then combined to create the total mill levy. For example, if a home has a taxable assessed value of $200,000 and the combined mill rate is 30 mills ($0.030), the annual property tax would be $6,000.

Available Property Tax Reductions

Property owners may be eligible for reductions, known as exemptions, that lower their tax liability by removing a portion of the property’s assessed value from taxation. To receive these benefits, homeowners must submit an application to their local tax office to prove they meet the eligibility criteria. The specific amount of the reduction varies significantly from one jurisdiction to another.

Common exemptions include:

• Homestead exemptions for an individual’s primary residence, which provide tax relief to owner-occupants.
• Senior citizen exemptions, which are available to older homeowners and may be based on age and income.
• Disability exemptions for individuals with qualifying disabilities.
• Veterans exemptions for those who served in the armed forces, with enhanced benefits sometimes available for service-connected disabilities.

These programs ease the tax burden by lowering the assessed value on which the tax bill is calculated. For instance, if a home with an assessed value of $250,000 qualifies for a $50,000 homestead exemption, taxes will be based on a value of $200,000.

The Property Tax Billing and Payment Process

The county tax collector’s office mails the official property tax bill to the homeowner. This document details the assessed value, the various tax rates from different local entities, any exemptions applied, and the total amount due.

Homeowners have two primary methods for paying their property tax bill. The first is to pay the taxing authority directly, which can be done through online payment portals, by mail, or in person. The second method is through a mortgage escrow account.

When a homeowner has a mortgage, the lender sets up an escrow account to manage payments for property taxes and homeowners insurance. A portion of the monthly mortgage payment is deposited into this account, and the lender uses these funds to pay the tax bills directly to the local authority when they are due. Tax payments are often due in installments, such as semi-annually, and it is important to meet these deadlines to avoid penalties.