Overview of Property Taxes
Property taxes in America are collected by local governments and are usually based on the value of a property. The money collected is generally used to support community safety, schools, infrastructure and other public projects. Use these tools to better understand the average cost of property taxes in your state and county.
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To calculate the exact amount of property tax you will owe requires your property's assessed value and the property tax rates based on your property's address. Please note that we can only estimate your property tax based on median property taxes in your area. There are typically multiple rates in a given area, because your state, county, local schools and emergency responders each receive funding partly through these taxes. In our calculator, we take your home value and multiply that by your county's effective property tax rate. This is equal to the median property tax paid as a percentage of the median home value in your county.
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Jennifer Mansfield Tax
Jennifer Mansfield, CPA, JD/LLM-Tax, is a Certified Public Accountant with more than 30 years of experience providing tax advice. SmartAsset’s tax expert has a degree in Accounting and Business/Management from the University of Wyoming, as well as both a Masters in Tax Laws and a Juris Doctorate from Georgetown University Law Center. Jennifer has mostly worked in public accounting firms, including Ernst & Young and Deloitte. She is passionate about helping provide people and businesses with valuable accounting and tax advice to allow them to prosper financially. Jennifer lives in Arizona and was recently named to the Greater Tucson Leadership Program.
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All About Property Taxes
When you purchase a home, you'll need to factor in property taxes as an ongoing cost. After all, you can rely on receiving a tax bill for as long as you own property. It’s an expense that doesn’t go away over time and generally increases over the years as your home appreciates in value.
And what you pay isn’t regulated by the federal government. It’s based on state and county tax levies. Therefore, your property tax liability depends on where you live and the value of your property.
In some areas of the country, your annual property tax bill may be less than one month’s mortgage payment. In other places, it can be as high as three to four times your monthly mortgage costs. With property taxes being so variable and location-dependent, you’ll want to take them into account when you’re deciding on where to live. Many areas with high property taxes have great amenities, such as good schools and public programs, but you’ll need to have room in your budget for the taxes if you want to live there.
A financial advisor in your area can help you understand how homeownership fits into your overall financial goals. Financial advisors can also help with investing and financial plans, including taxes, homeownership, retirement and more, to make sure you are preparing for the future.
What Are Property Taxes?
Simply put, property taxes are taxes levied on real estate by governments, typically on the state, county and local level. Property taxes are one of the oldest forms of taxation. In fact, the earliest known record of property tax dates back to the 6th century B.C. In the U.S., property taxes even predate income taxes. While some states don't levy an income tax, all states, as well as Washington, D.C., have property taxes.
For state and local governments, property taxes are necessary to function. They account for most of the revenue needed to fund infrastructure, public safety and public schools, not to mention the county government itself.
You may have noticed already that the best public schools are typically in municipalities with high home values and high property taxes. While some states provide state funds for county projects, other states leave counties to levy and use taxes fully at their discretion. For the latter group, this means funding all county services through property taxes.
To get an idea of where your property tax money might go, take a look at the breakdown of property taxes in Avondale, Arizona.
You can see that Maricopa County takes a cut, as do local school districts and colleges, the library and the fire department. While this shows a specific example, you may not find the same breakdown of tax levies where you live. Your property tax bill often depends on county budgets, school district budget votes and other variable factors that are distinct to where you own property.
How Do Property Taxes Work?
Let's define a couple of key terms before we get into the details of how property taxes work. First, you must become familiar with the "assessment ratio." The assessment ratio is the ratio of the home value as determined by an official appraisal (usually completed by a county assessor) and the value as determined by the market. So if the assessed value of your home is $200,000, but the market value is $250,000, then the assessment ratio is 80% (200,000/250,000). The market value of your home multiplied by the assessment ratio in your area equals the assessed value of your property for tax purposes.
Wondering how the county assessor appraises your property? Again, this will depend on your county’s practices, but it’s common for appraisals to occur once a year, once every five years or somewhere in between. The process can sometimes get complicated. In a few states, your assessed value is equal to the current market rate of your home. The assessor determines this by comparing recent sales of homes similar to yours. In other states, your assessed value is thousands less than the market value. Almost every county government explains how property taxes work within its boundaries, and you can find more information either in person or via your local government’s website.
Another crucial term to understand is millage rates. The millage rate is the amount per $1,000 of property value that's levied in taxes. Millage rates are expressed in tenths of a penny, meaning one mill is $0.001. For example, on a $300,000 home, a millage rate of $0.003 will equal $900 in taxes owed ($0.003 x $300,000 assessed value = $900).
To put it all together, take your assessed value and subtract any applicable exemptions for which you're eligible and you get the taxable value of your property.
That taxable value then gets multiplied by the sum of all applicable millage rates. As you can see in the Avondale, Arizona example above, each school district has its own millage rate. All the separate tax levies are added and then applied to your taxable value. The number you calculate (millage multiplied by taxable value) tells you the property taxes owed before any credits. Note that tax credits are different from exemptions and aren’t universally available. You’ll have to check with your county to see if you’re eligible for any.
These credits are subtracted from any taxes you might owe. Once you find that number, you have your total property tax bill.
How you pay your property taxes varies from place to place. Some people pay extra each month to their mortgage lender. The lender keeps that money in escrow and then pays the government on behalf of the homeowner. Other people pay their property tax bill directly to the county government on a monthly, quarterly, semi-annual or annual basis. Your payment schedule will depend on how your county collects taxes.
What Are Property Tax Exemptions?
Here's a breakdown of some of the most common property tax exemptions:
- Persons with disabilities
- Senior Citizens
- Veterans/Disabled Veterans
Most states and counties include certain property tax exemptions beyond the full exemptions granted to religious or nonprofit groups. These specialized exemptions are usually a reduction of up to 50% of taxable value. However, rates can vary.
Some states offer exemptions structured as an automatic reduction without any participation by the homeowner if your property is your primary residence. Other states and counties require applications and proof for specific exemptions such as a homeowner who’s a disabled veteran.
Let’s look at an example with regard to the homestead exemption, which safeguards the surviving spouse and protects the value of a home from property taxes and creditors in the event a homeowner dies.
Say your state offers a homestead exemption for a homeowner’s primary residence that offers a 50% reduction of the home's taxable value.
This means that if your home was assessed at $150,000, and you qualified for an exemption of 50%, your taxable home value would become $75,000. The millage rates would apply to that reduced number, rather than the full assessed value.
It’s worth spending some time researching whether you qualify for any applicable exemptions in your area. If you do, you can save thousands over the years.
Property Taxes by State
Overall, homeowners pay the most property taxes in New Jersey, which has some of the highest effective tax rates in the country. The state’s average effective rate is 2.44% of a home's value compared to the national average of 1.08%.
With an average effective rate of 0.27%, the least expensive state for property taxes is Hawaii, surprisingly. Despite its reputation as a costly place to live, Hawaii has generous homeowners exemptions for primary residents that lower taxable values considerably. The tax break generally helps those who live in Hawaii full-time, rather than those who own a second home there.
Also of note are Colorado and Oregon’s property tax laws, which voters put in place to limit large taxable value increases. Many states don’t have caps on how much property taxes can change annually, but those two are examples of state governments that put laws in place because of taxpayer concern.
When you're deciding where you want to buy a home, property taxes need to play a role in your deliberations. The amount of variance across county lines and school districts can be substantial. Unlike mortgage payments, property taxes never go away. You may be able to get a property tax break when you're a senior, but you should plan on having property taxes as a permanent part of your budget before you take the leap into homeownership.
Property Tax: Which Counties are Getting the Best Bang for Their Buck
SmartAsset’s interactive map highlights the places across the country where property tax dollars are being spent most effectively. Zoom between states and the national map to see the counties getting the biggest bang for their property tax buck.
Our study aims to find the places in the United States where people are getting the most for their property tax dollars. To do this we looked at school rankings, crime rates and property taxes for every county.
As a way to measure the quality of schools, we analyzed the math and reading/language arts proficiencies for every school district in the country. We created an average score for each district by looking at the scores for every school in that district, weighting it to account for the number of students in each school. Within each state, we assigned every county a score between 1 and 10 (with 10 being the best) based on the average scores of the districts in each county.
For each county, we calculated the violent and property crimes per 100,000 residents.
Using the school and crime numbers, we calculated a community score. This is the ratio of the school rank to the combined crime rate per 100,000 residents.
We used the number of households, median home value and average property tax rate to calculate a per capita property tax collected for each county.
Finally, we calculated a tax value by creating a ratio of the community score to the per capita property tax paid. This shows us the counties in the country where people are getting the most bang for their buck, or where their property tax dollars are going the furthest.
Sources: US Census Bureau 2017 American Community Survey, Department of Education, Federal Bureau of Investigation, State Police or Justice Department websites