What are property taxes?

Property taxes are a mandatory, ongoing expense of homeownership. That’s because when you buy a home, it comes with all kinds of public services that aren’t included in the purchase price. You have to pay for these services whether you use them a ton, occasionally, or not at all — and so does everyone else in your area.

What are property taxes and how do they work?

Property taxes are a major revenue source for state, county, and local governments. On average, they contributed about 72.2% taxes collected by local governments in fiscal year 2020, according to the latest data from the nonprofit Tax Foundation.

Your state, county, and local governments — including city councils, school boards, townships, municipalities, and special districts — are in charge of setting property tax rates. Voters can sometimes influence these rates as well. For example, California voters passed Proposition 13 in 1978 to prevent property tax bills from skyrocketing.

What do property taxes pay for?

Governments use property tax revenue to pay for expenses that benefit both individual property owners and the community. Here’s an example.

If you own a home, you probably take public roads to get there and run errands around town. While you’re out driving, if you see a wayward cow in the middle of a busy street, you can call animal control to rescue it. If the cow, safely back in its barn that night but still agitated from the day’s events, kicks over a lantern, its owner can call the fire department to put out the blaze.

What’s more, the owner can call the fire department even if she’s eight months late on her property tax bill and the county has put a lien on her farm. No one wants to see the whole town catch on fire.

Property tax payment schedules and penalties

Most people do pay their tax bills on time — the penalties for being late are steep. They start with late fees and eventually lead to foreclosure. Some jurisdictions don’t even let homeowners keep their home equity when they lose their homes over unpaid property taxes. Your property tax bill is the last thing you want to lose track of.

That’s why, if you have a mortgage with an escrow account, your loan servicer will collect 1/12 of your annual property tax liability with each monthly mortgage payment, then pay your local tax collector by the deadline.

If you don’t have an escrow account, you’ll need to set the money aside each month and pay the bill yourself. You might be able to pay your bill in a couple of installments.

Many places issue property tax bills once a year, but the schedule varies by location. In addition, your tax amount may change annually or at a different interval, such as every three years. It depends on how often your jurisdiction reassesses properties and changes tax rates.

Property taxes vs. real estate taxes

Property taxes can be assessed on both real property — such as homes, office buildings, and farmland — and personal property, such as automobiles, boats, airplanes, and business equipment.

Real estate taxes are a type of property tax, and people often use the terms interchangeably. For example, if you want to learn how to claim your property taxes on your federal tax return, you’ll want to read the IRS’s rules about deductible real estate taxes.

Mobile homes are a special case. They may be subject to either personal or real property taxes, depending on the jurisdiction and whether the mobile home is attached to a foundation.

Localities may also charge other real estate taxes, such as transfer taxes and stamp or documentary taxes. These apply when a home changes ownership and government employees need to update public records.

How to calculate your property taxes

To calculate your property tax bill, you first need to know your property’s assessed value. It may be the full market value of your real estate or a lesser amount, depending on where you live and whether you qualify for any exemptions (discussed in the next section).

Once you know your home’s assessed value, you can multiply it by the property tax rate to determine your property tax amount.

For example, suppose you live in San Diego County. Your home’s market value is $900,000, but the assessed value, or taxable value, of its land and improvements is only $120,000. You qualify for the $7,000 homeowners exemption, which lowers your assessed value to $113,000.

Your tax rate is 1.12%, which consists of a flat tax of 1% plus a bunch of smaller taxes. These include voter-approved bonds that support your local community college and public school district, along with charges for mosquito control, the water district, the local hospital, and the local zoo.

Multiply $113,000 by 0.0112 and your total annual bill comes to $1,265.60.

Property tax exemptions

Property tax exemptions can lower your property tax bill. They typically do this in one of two ways:

1. By reducing the amount of your home’s assessed value that you pay tax on. For example, instead of owing tax on $300,000, you would owe tax on $290,000.
2. By reducing the tax rate you pay on your home’s assessed value. For example, instead of paying a tax rate of 1.25%, you would pay a tax rate of 1.20%.

These are some of the most common types of property tax exemptions available to homeowners:

• Homestead exemption: Provides owner-occupants a discount on their property tax bill.
• Senior exemption: Reduces property taxes for older homeowners. The minimum age varies by location, and other requirements may apply, such as having income under a certain threshold or having owned the home for a certain number of years.
• Disability exemption: Having a total and permanent disability can reduce or eliminate your property tax bill.
• Veteran exemption: Those who have served in the armed forces may save on property taxes, particularly if they are disabled.

In addition to exemptions, circuit-breaker programs provide property tax relief to homeowners in 29 states whose property tax bills represent a disproportionate share of their income. Age, disability, and income requirements typically apply.

To get any form of property tax relief, you’ll typically need to apply by a certain deadline.

Property tax FAQ

Which states have the highest and lowest property taxes?

In 2021, New Jersey, Illinois, and New Hampshire had the highest effective property tax rates on homeowners, according to the most recent data from the Tax Foundation. Hawaii, Alabama, and Colorado had the lowest effective rates.

Will my property taxes be affected if the value of my house changes?

In most cases, yes, because property tax amounts are calculated as a percentage of a home’s taxable or assessed value, which is affected in part by its market value. When your home’s value changes because of market conditions, renovations, or damage, your local tax authority will typically reassess your property’s value. Your next property tax bill will reflect these changes.

Will I still need to pay property taxes after my mortgage is paid off?

Yes. As long as you own the property, you will be responsible for paying property taxes. These taxes don’t correlate to your mortgage. If you are paying your property taxes in monthly installments through an escrow account with your mortgage servicer, however, the way you pay your property taxes will change once you’re mortgage-free.

What is included in property taxes?

Property taxes pay for the regular operating expenses of certain state, county, and local government services. These include government employee salaries and benefits, as well as property maintenance and operations for public schools, libraries, parks, fire stations, roads, courthouses, and police departments. Property taxes may also pay for special projects, such as local infrastructure improvements, that are financed by voter-approved public bonds.