How Property Taxes Are Calculated

Millions of households pay property taxes each year. Property taxes are imposed by cities, counties, and school districts on properties within their jurisdictions and used to fund services.

All of these levies are put together to generate the overall tax rate (known as a mill rate) for an area. This rate is then multiplied by a property’s assessed value, so that persons with more valuable properties pay more.

Key Takeaways

• Cities, counties, and school districts in an area each have the authority to charge taxes on the properties within their borders, and property tax rates are determined independently for each jurisdiction.
• The overall tax rate—known as a mill rate—for a whole area is then calculated by adding all of the levies together.
• Property taxes are computed by multiplying the mill rate by the assessed value of your property.
• The market value of your property is determined using one or more of three methods: a sales assessment, the cost approach, and the income technique.
• The market value is then multiplied by an assessment rate to arrive at the assessed value.

Assessing Property Tax

Different forms of taxes are levied on the land and its constructions depending on the property classification. For example, unoccupied land will have a substantially lower assessed value than a similar piece of renovated property, resulting in reduced property taxes. If public facilities such as sewage, water, and gas are available, the land assessment may be higher. If the assessor believes that the property has the potential to be developed, the owner may face a higher assessment and higher taxes. The amount taxed on a property is determined by a percentage of its assessed value.

Property taxes are a significant source of revenue for municipal and county governments. The many boards, councils, and legislatures convene to determine the proper rates. They undertake budget hearings to assess how much money is needed to provide the many services that the local community need. Property taxes pay for these services, which include education, transportation, emergency services, parks, recreation, and libraries.

Beginning with the 2018 tax year, the Tax Cuts and Jobs Act imposed a $10,000 per year (or $5,000 for married couples filing separately) restriction on federal deductions for state and local taxes (SALT).This amount covers all property taxes, including real estate, income, and sales taxes.

WATCH: How Are Property Taxes Calculated?

Calculating Property Taxes

Property taxes are computed based on the property’s worth. This covers the land as well as the structures on it. Typically, tax assessors will evaluate the property every one to five years and charge the owner of record the appropriate rate based on the taxing authority’s requirements. Assessors compute that value by combining the mill levy (commonly known as the millage tax) with the assessed property value.

Example of a Property Tax Calculation

A property’s tax rate is determined by the number of municipal and school districts it is located in, as well as the rates levied by each. This total rate is known as the mill levy. In general, every city, county, and school district has the authority to charge taxes on the properties within its borders. Each entity determines its own mill levy, which is then added together to get the overall mill levy.

The mill levy is the total tax rate charged on the value of your property, with one mill equaling one-tenth of a penny. So, one mill equals $1 for every $1,000 of assessed property value.

Assume a county’s total assessed property worth is $100 million, and the county determines that it requires $1 million in tax income to perform its required functions. The mill levy would be one percent, or $1 million divided by $100 million. Alternatively, if the city and school district computed mill levies of 0.5% and 3%, respectively, the region’s total mill levy would be 4.5% (1% + 0.5% + 3%) or 45 mills.

Two further processes are necessary to determine a tax bill. First, the value of a property is determined using one of the techniques given below. The assessment rate, which varies by jurisdiction and indicates the proportion of a property on which taxes are owed, is then multiplied by the value.

Assume the assessor concludes that your property is worth $500,000 and the assessment rate is 8%. The assessed value is $40,000. Using the previously estimated mill levy of 4.5%, the tax owed would be $1,800 ($40,000 4.5%).

3 Ways to Assess Property Value

Property taxes are computed by multiplying the mill levy by the assessed value of the owner’s property. The assessed value is an assessment of your home’s fair market worth. It is based on the current situation of the local real estate market.

To evaluate the total worth of your property, the assessor will analyze all pertinent facts around it. To provide you with the most accurate assessment, the assessor must consider what comparable properties are selling for under current market conditions, how much the property’s replacement costs would be, the property owner’s maintenance costs, any improvements completed, any income you are earning from the property, and how much interest would be charged to purchase or construct a property comparable to yours.

The assessor may estimate the market value of the property using one of three distinct methodologies, and they can use any combination of the three.

1. Performing a Sales Evaluation

The assessor determines the value of the property based on similar transactions in the region. Location, property condition, any upgrades, and general market conditions are key criteria. The assessor then adds modifications to the values to reflect particular property changes, such as new additions and renovations.

2. Cost Method

This is when the assessor assesses the worth of your property based on the cost of replacing it. Assessors calculate the amount of depreciation that has occurred and how much the property would be worth if it were unoccupied if it is older. For newer properties, the assessor deducts any reasonable depreciation and considers the price of construction materials and labor, including these numbers into the property’s ultimate valuation.

3. Income Method

This strategy is based on how much money you might generate from renting the home. The assessor uses the income technique to analyze the expenses of keeping the property, managing the property, insurance, and taxes, as well as the return that you may reasonably expect from the property.

Assessed Value

After ascertaining the market value of the property, the assessed value will be calculated by multiplying the actual value by an assessment rate. This rate is a fixed percentage that varies by tax jurisdiction and may be any amount less than 100%. Your property taxes are calculated by multiplying the assessed value by the mill levy.

Once the assessor has determined the value, they proceed in two stages: First, they provide the owner the assessed value of the property. Then they provide you with a tax bill.

How Your Property Value Is Assessed

Depending on the town where the property is situated, most property tax assessments are done either yearly or every five years. A property tax bill is sent separately when the owner receives their assessment with their property value.

The information held by the assessor is deemed public record. Owners may find out how much they owe by visiting the assessor’s website and inputting their address. They may be charged a modest price to view this information on occasion. Another method is to visit the county courthouse’s assessor’s office. You may search up the information and print a copy for a small cost after you arrive at the county courthouse.

Why is my property tax higher than my neighbor’s?

The majority of the time, this is due to your home’s assessed value being greater. Your home’s worth may increase if you have a bigger piece of land, if it is larger, or if it contains desired characteristics. However, in very rare instances, you may reside in a different jurisdiction than your neighbor.

What state has the highest property taxes?

According to statistics from the Tax Foundation, a tax policy research group, the mean effective property tax rate in the United States for 2019 was 1.03% (total real estate taxes paid divided by total house value). At 2.13%, New Jersey had the highest rate in the nation. The state of Hawaii had the lowest rate, at 0.31%.

The Bottom Line

Property taxes might be perplexing. To pay the correct amount, you must first understand how the tax is calculated, where you can acquire this information, and when tax invoices are mailed out and due. Residents in certain cities may see and/or pay their property tax bills online. Property owners should do their share to be informed by understanding how taxes are computed, when the billing cycle occurs, and where they may find it.

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