For American homeowners, real estate taxes are an immutable fact of life. Virtually every homeowner pays real estate tax — property tax, in common parlance — to at least one jurisdiction:
- Incorporated villages, towns, boroughs, or cities
- Counties or parishes
- School or utility districts
- Special tax assessment districts, whose revenues go toward specific initiatives or into specific funds
Notice that these are mainly local or regional units of government, known as tax authorities.
State governments may pass laws that directly or indirectly impact property tax collections. But they generally don’t assess property taxes for their own purposes.
How to Calculate Real Estate Taxes on Your Property
According to the Institute on Taxation and Economic Policy, local tax authorities calculate property taxes using the following formula:
- Assessed Value: Market value x assessment ratio
- Taxable Value: Assessed value – exemptions
- Property Tax Before Credits: Taxable value x total millage rate
- Total Property Tax Owed: Property tax before credits – homestead credits and circuit breakers
Note that the values for exemptions, homestead credits, and circuit breakers can all be zero. In these cases, property tax can be calculated with an even simpler formula: assessed value x total millage rate.
Property Tax Definitions
Let’s break down this formula even further:
Market Value
This is your taxing authority’s best guess at your property’s fair market value. That is, what it would sell for if someone made an offer on it tomorrow. It’s calculated using public and privileged information about your property.
Factors that affect your home’s market value include:
- Location
- Values for comparable properties sold recently nearby (“comps”)
- Recent additions or upgrades
- General condition, which is a function of age and maintenance history
Market value is the most subjective factor in property tax calculations. It therefore plays a key role in most property tax assessment appeals.
Assessment Ratio
The assessment ratio can range from 0 to 1. Think of it as a discount to fair market value. In many jurisdictions, the assessment ratio is high, exceeding 0.9. But in others, it’s quite low — 0.2 to 0.4.
Some states have laws that preempt dramatic changes to local assessment ratios or establish uniform ratios across jurisdictions. Others impose more complex rules that effectively limit assessment ratio increases. For instance, New York state law limits “the growth in annual levy … to the lesser of 2 percent or the Consumer Price Index (CPI), subject to certain limited exceptions and adjustments” outside the five boroughs of New York City.
Assessment ratios often vary by property type as well. For instance, commercial or agricultural property may have a lower assessment ratio than residential property.
Property Tax Exemptions
Property tax exemptions reduce assessed taxable value for select homeowner groups. Common exemptions cover:
- Homesteads (primary residences)
- Senior citizens, although often excluding high-income seniors
- Disabled homeowners
- Active-duty service members and veterans
- Households falling below certain low-income thresholds
- Homes that have seen energy-efficient home improvements and certain other renovations and upgrades
Millage
“Millage rate” is a fancy way of saying “tax rate.” A given property’s total millage rate is the sum of all applicable property tax rates. So, where a property lies in two overlapping tax jurisdictions, such as county and school tax districts, it could be subject to two property tax rates (or more).
Property Tax Credits
Property tax credits directly reduce property tax liability. In some jurisdictions, homestead benefits are awarded via credits rather than exemptions. Other common property tax credits include:
- Credits for taxes assessed by overlapping districts, such as school levy credits on county taxes
- “First dollar” credits for improvements to vacant land
- Lottery or gaming credits financed by receipts from state lotteries or local gaming facilities
Don’t confuse credits applied directly to property taxes with property tax credits applied to state income taxes.
Circuit Breakers
Property tax circuit breakers are special credits for low-income homeowners in high-tax jurisdictions.
According to the Institute on Taxation and Economic Policy, a circuit breaker reduces property taxes to a predetermined maximum percentage of a taxpayer’s income. So, if your home city’s circuit breaker caps property taxes at 5% of income and you earn $50,000 annually, you can pay no more than $2,500 in property taxes each year.
Who Is Totally Exempt From Property Tax?
Even after factoring in exemptions and credits, most middle- and high-income homeowners are required to pay at least some property tax. Very low-income homeowners who qualify for exemptions due to protected status may effectively pay no property tax.
Institutions totally exempt from property tax liability under normal circumstances include:
- Religious organizations and houses of worship
- Nonprofit organizations and NGOs
- Nonprofit educational institutions and adjacent organizations
These organizations are generally exempt from other state and federal taxes as well.
How You’re Notified About Your Property Taxes
Property tax assessments become binding on a set date each year. In legal parlance, they’re said to become “attached” on this date. The attachment date varies by jurisdiction but is often the first day of the calendar year (January 1) or fiscal year (often October 1).
Proposed Property Taxes
Most jurisdictions send proposed property tax notifications late in the year prior to the binding date. If your binding date is January 1, you’ll likely receive your proposed tax notification in October or November.
The notification will be pretty detailed, with lines for all the factors involved in your property tax calculation. It’ll include assessed value (including the change from the prior year), total millage rate, exemptions, credits, homestead information, and special assessments.
Where multiple jurisdictions assess property taxes, homeowners may receive one consolidated assessment notification or multiple notifications from each jurisdiction.
Deadline to Appeal
Your proposed property tax notification will include an appeal deadline. The deadline can be as little as 30 to 45 days after you receive the notification but may be longer. Regardless, this is the most important date on your property tax calendar, so don’t forget it. Once it passes, it’s much harder — if not impossible — to appeal your property tax assessment or recover tax overages from previous years.
Tax Statements
Once your property taxes are set and the deadline for appeal has passed, you’ll receive a tax statement outlining when and how much you need to pay. Most jurisdictions accept tax payments twice per year, each accounting for half of the total. Where taxes are delinquent or special assessments required, payment sizes might be uneven.
Final Word
Local tax authorities don’t assess property taxes uniformly. Where you live has a lot to say about how much property tax you can expect to pay.
The northeastern United States is infamous for its hefty property tax burdens, while most southern and western states are much more homeowner-friendly. According to the Tax Foundation, New Jersey had the highest effective property tax rate (2.13%), followed by Illinois (1.97%) and New Hampshire (1.86%). Hawaii had the lowest effective rate (0.31%), followed by Alabama (0.37%).
But these percentages tell only part of the story. In states where property is expensive, like Hawaii and California (0.70% average effective property tax rate, per the Tax Foundation), the owner of a median-priced home could pay more in property taxes than their counterpart in a “higher-tax” state with lower property values. Just one more reason to know how to calculate your property taxes.
