Property taxes are one of the most consistent and significant ongoing expenses that homeowners face. But despite their importance, they’re often misunderstood. Why do two houses on the same street have different tax bills? What causes taxes to rise? How do assessors determine your home’s value?
Whether you're preparing to buy, already own, or are thinking of selling, understanding how property taxes are calculated can help you budget accurately, challenge inaccuracies, and make smarter real estate decisions. Let’s take a closer look at how this process works, and what it means for you.
What Are Property Taxes?
Property taxes are taxes paid by property owners to local governments, typically at the city, county, or township level. These taxes help fund essential services that benefit the community, such as:
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Public schools
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Road maintenance
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Police and fire departments
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Public parks and recreation
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Local government operations
Because they support these local needs, property taxes can vary dramatically depending on where you live, even within the same state.
How Property Taxes Are Calculated
Although the exact formula can vary by jurisdiction, property taxes are generally calculated using this formula:
Assessed Value × Tax Rate = Property Tax
Let’s break this down further.
1. Assessed Value
This is the value that the local tax assessor assigns to your property for tax purposes. It's not necessarily the same as market value (what your home would sell for), but it's often based on similar criteria, such as:
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Size of the home and lot
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Location
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Property improvements or renovations
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Comparable home sales in the area
Depending on where you live, your home may be assessed annually, bi-annually, or on a set cycle (e.g., every 5 years).
Some areas also use a percentage of market value for assessments. For example, your county might assess property at 50% of its market value, so a home worth $400,000 would be assessed at $200,000.
2. Tax Rate (Millage Rate)
The tax rate is often referred to as the mill rate, derived from the Latin word "millesimum," meaning "thousandth." One mill equals $1 for every $1,000 of assessed value.
So if your tax rate is 25 mills, that means you pay $25 for every $1,000 of assessed property value. A home assessed at $200,000 would owe $5,000 in taxes under that rate.
Tax rates are determined by local taxing authorities, including counties, school districts, and municipalities, and can change annually based on budget needs and voter-approved levies.
Why Property Taxes Vary by Location
Two identical homes in different locations can have vastly different tax bills. This is because tax rates are determined locally and can be influenced by:
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Local school funding requirements
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City services and infrastructure needs
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Voter-approved bond measures
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State laws regulating caps and assessments
For example, a city with a highly rated public school system and robust services may require more funding, resulting in higher tax rates than a rural township.
Why Property Taxes Go Up
Several factors can increase your property tax bill over time:
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Rising home values: If your property’s assessed value goes up due to market appreciation, your taxes may increase.
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New construction or renovations: Adding a deck, finishing a basement, or upgrading a kitchen can lead to a higher assessed value.
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Increased tax rates: If your municipality or school district increases the millage rate to meet budgetary needs, your taxes will go up.
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Expired tax exemptions: If you lose a senior discount, homestead exemption, or veteran status, you may pay more.
Can You Challenge Your Property Tax Assessment?
Yes! If you believe your home has been over-assessed (i.e., valued too high), you can typically file a tax appeal with your local assessor’s office. You’ll often need to provide evidence, such as:
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Recent appraisal reports
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Comparable home sales data
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Photos of your home’s condition
Appeals usually have deadlines, so it’s important to act quickly if you suspect an error.
Property Tax Exemptions and Credits
Many states offer tax relief programs to certain homeowners. Common exemptions include:
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Homestead exemption: Reduces the taxable value of your primary residence.
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Senior citizen exemption: Offers relief to qualifying older adults.
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Veteran or disability exemptions: Provide discounts or freezes based on service or medical status.
Each state and municipality sets its own rules, so check with your local tax office to see what programs you may be eligible for.
How to Budget for Property Taxes
If you’re a homeowner with a mortgage, your lender typically collects property taxes monthly as part of your escrow payment and pays the taxes on your behalf. But it’s still your responsibility to understand the tax amount and verify it annually.
If you own your home outright, you’ll pay property taxes directly, usually in one or two installments each year. Be sure to plan for this significant expense, it’s not one you want to be surprised by.
Understanding how property taxes are calculated, and why they vary, is a crucial part of responsible homeownership. From knowing how your home is assessed to recognizing the factors that influence your tax bill, this knowledge empowers you to plan ahead, avoid surprises, and even challenge incorrect assessments if necessary.
For expert insight into property taxes and all aspects of homeownership, trust Sam Kaplunov, your reliable guide in the world of real estate.
