How Does Property Tax Work?

When we think about the cost of homeownership, a few staples immediately come to mind. Your mortgage, maintenance costs, homeowners insurance and potential HOA fees often top the list—then there are property taxes. It’s something that generated a whopping $487 billion for local governments in 2016, according to research from the Tax Policy Center.

But how does property tax work, and what exactly is it used for? In short, if you own a home, you can expect to cough up taxes to your local and/or state government. It’s a hidden cost that can catch you by surprise if you aren’t budgeting for it.

What is property tax?

The Urban Institute reports that, for the most part, property tax is levied by cities, counties and school districts.

“The biggest part of the American dream, besides doing better than your parents, is owning a home,” said Adam Leitman Bailey, a New York City-based real estate attorney. “In order to pay for things like sanitation, schools and the infrastructure of our cities and towns, the government needs money.”

Property taxes provide this revenue.

How does property tax work?

Property tax is not a fixed thing that homeowners simply pay year after year, but rather a fluctuating expense that changes over time. According to property tax expert Valerie Swihart, the tax is calculated as a percentage of the assessed value of the property—regardless of how much you owe on your mortgage or how long you’ve lived there. The only outlier here is California, which ties a homeowner’s assessed property value to the year they purchased the property. (More on this in a minute.)

Assessors periodically reassess property values, which help determine the current property tax rate. How often this happens varies from state to state.

“Forty-nine states evaluate the assessed value either every year, every other year, every third year or every fourth year,” said Swihart. “So periodically, the values are reviewed and updated based on the current real estate market.”

She adds that, generally speaking, property taxes are due to your local assessor’s office twice a year; once in the spring and once in the fall. However, the majority of homeowners don’t make these payments directly.

“Many times, [the mortgage lender] will pay your taxes for you, and then you reimburse them,” said Bailey. “The bank does that to make sure your taxes are being paid because they don’t want your property to be foreclosed on without knowing about it.”

In other words, most mortgage lenders will break up your property tax responsibility into monthly installments, then collect that along with your mortgage bill every month. If you don’t have a mortgage, then you’re responsible for paying your property taxes directly to your local assessor when they come due.

How to calculate property tax

Again, how much you’ll pay in property tax is driven by your property’s value. Assessors make this determination by evaluating the sales of similar homes in your area around the time of the lien date. This is what helps them figure out the market value, according to Swihart.

“The challenge often is that they do not have firsthand knowledge of the condition of the homes or how updated they are, which will vary the value tremendously,” she said.

With that said, she added that the key factors they need to review when determining the value of a single-family home include:

• Lot size/amount of land
• Finished square footage
• Basement (if any)
• Garage (attached/detached)
• Number of bedrooms
• Number of bathrooms
• Year built

Your property tax then comes through as a percentage of that assessed property value. The exact percentage will vary depending on where you live as rates are determined by local governments.

The most expensive counties in the country are all in close proximity to New York City, with property taxes that exceed $10,000 per year, according to a tax policy nonprofit called the Tax Foundation. (Higher median tax payments typically pop up in urban areas, according to the nonprofit.) Meanwhile, the median property tax in Lamar County, Alabama, is just $215.

As hinted earlier, California is unique in the way that it assesses property values—which has a direct impact on property taxes. It’s all thanks to something known as Proposition 13. Adopted in 1978, it tethers homeowners to the original purchase price of their home, then tacks on an annual increase of either 2% or the rate of inflation; whichever is lower. So if you bought your house in 2001 for $200,000, that’s the “base value” for your assessment, even if the true market value is now much higher.

“Prop 13 was implemented to ensure that as Californians retired, they wouldn’t lose their homes due to the hyperescalation of the California real estate market,” said Swihart.

How to lower your property taxes

“If you want to know if your taxes are high, there’s a very easy answer: It’s called gossip,” said Bailey.

Ask around to see what your neighbors are paying. Have similar homes in your area been valued for more or less than yours? If what you’re paying seems too high, you have the right to question it.

“Normally, the appeals process is easier than you think,” said Swihart, adding that most real estate agents can help you find comparable home values in your area. “Also, the people who work in the assessor’s office can easily help you with this process.”

In some cases, your tax assessor may agree to lower your tax burden without requiring a formal tax appeal, according to the National Association of Realtors. If you do decide to start an appeal, understand that the process is different in every state—so clarify the next steps with your assessor.

Another step: Take a look at whether you’re entitled to any exemptions. If so, are they being applied to your property taxes? For example, local governments in Texas provide property tax breaks to homeowners aged 65 or older, disabled persons, veterans and more.

No matter how it shakes out, take heart in knowing that up to $10,000 paid in state and local taxes is tax-deductible.

The bottom line on property taxes

Property taxes are levied by local governments to generate revenue for services that benefit the community as a whole. How much you pay is based on a percentage of the assessed value of your home. Property tax rates also vary widely from town to town throughout the United States, with rates generally being higher in and around bigger cities.

The good news is that you do have the right to appeal your tax burden. As Swihart puts it, “The best way to prevent overpaying would be to pay attention.”