How Property Tax Works

Homeownership comes with its own set of obligations that you may not have otherwise known about. You will undoubtedly factor in your down payment and closing costs when establishing your affordability, but maintenance costs, HOA fees, and various other expenses may get overlooked. Property taxes are one of those obligations that you may not have considered when budgeting for your home.

We’ll help you cut through the confusion surrounding this real estate tax so you can figure out how much you’ll owe and how it gets calculated.

What Are Property Taxes?

Property taxes are a tax levied on real estate you own. The money raised through your property tax goes to your local government and plays a significant role in shaping how public services help your community, often serving as funds for infrastructure improvements, schools, law enforcement, or other public services. The exact property tax you pay will vary depending on the city or county you live in, but it is typically based on your home’s location and value.

During your home search, your real estate agent or your lender can advise you on whether your desired home location is in an area with high property tax rates. This can help you plan your annual budget or may persuade you to look at another location.

How Are Property Taxes Calculated?

As mentioned above, your local government uses the money raised through property taxes to pay for public services. How does your government know how much to charge each homeowner? Let’s use a simple example to highlight the correlation between your property’s value, the amount needed to pay for public services, and your property tax.

Imagine a small city where there are three homes, each worth a different value. The homeowners in our town will pay a tax based on what each house is worth. In order for the government to provide all the services required for the city to function, they need to raise $1,000. They collect this money through property taxes.

To find the exact tax rate, each home’s value is added up and divided by the cost to provide public services — $1,000 in our scenario. So, if our city’s homes are worth $100,000, $110,000, and $120,000, the total value in our city is $330,000. This would leave the homeowners with a property tax rate of 0.30%. The calculated tax rate is then applied to each home’s value to come up with the total property tax for the year, or enough to cover the public services for our town.

Depending on your location, your home’s value will be re-assessed every one to five years. Assuming the cost of providing services to the city remains the same, the property tax rate would change based on the new assessment of the home’s value.

How Do I Calculate My Property Tax?

Calculating how much you owe in property tax each year only requires you to know two items — your home’s assessed value and the property tax rate in the city or county you live in.

Property Tax = Your Home’s Assessed Value x The Property Tax Rate

It will vary state to state, but assessments on your property for tax purposes may happen annually or once every few years. It’s important to note that, in some areas, the assessed value of your home may differ from the actual market value of your home. This is not cause for concern and is dependent on how your local city or state government have decided to calculate a home’s worth.

Once the home’s value is assessed based on local guidelines, it is multiplied by the tax rate to calculate your annual property tax.

Can I Avoid Paying Property Tax?

As a standard rule, paying property taxes is a necessary evil in owning real estate. Failure to pay your property taxes can result in interest and penalties and could even cause you to lose your home.

However, in special cases, there are property tax exemptions that you or the property you own may qualify for.

Depending on the law in the state, county, or city you reside in, assistance may be available to military veterans, those who are disabled, or the elderly. Exemptions are often also extended to religious groups and nonprofits. The most common property tax exemption is the homestead exemption, allowing you only to pay tax on a portion of your home’s value.

To see if you qualify for a property tax exemption, visit your local tax agency’s website to determine what relief is available.

Remember, property taxes can be a surprise if you’re a new homeowner or plan to be soon. It’s best to evaluate the tax rate in the area you are looking to reside in and plan your budget accordingly. The help of a great real estate agent can make this process easier. Don’t forget to double-check if you qualify for a property tax exemption each year.

If you have questions about property taxes or would like help determining your affordability during your home search, don’t hesitate to reach out to one of our certified mortgage experts! We’re always happy to help.