Property Taxes

Understanding Property Taxes

Property taxes are the largest non-mortgage expense an average homeowner faces. Unlike many of the other costs associated with owning a home, property taxes are a regular reoccurring cost that will need to be budgeted for on an annual basis. Moreover, property taxes increase as the value of your home increases. As your property appreciates in value over time, your property tax bill will also increase. As a result, it is critical for any homeowner or potential homeowner to fully understand how the property tax system works.

Overview of Property Taxes

Property taxes serve as the primary source of revenue for local governments across the country. Unlike the federal and state governments, which have the ability to tax income, local governments are primarily financed through property taxes. In 2017, for example, local governments collected $509 billion in property taxes, or 30 percent of local government general revenue. State governments, on the other hand, only collected about 1% of their total revenue from property taxes in the same year.

Depending on where you are located, there is substantial variation in how much you can expect to pay. In some places, like Hawaii, homeowners pay very little in property taxes. In other places, like Texas, homeowners pay significantly more than the national average. Although there are many factors that effect the price of a property, extremely high or extremely low property tax bills can effect on how much a property will sell for.

There are three main explanations that account for the significant variation in property tax levels: the types of revenues a local goverment has access to, the financial strength of a local goverment, and the quality of local goverment services.

In some states, local governments do not have the ability to raise revenue through other means, so are entirely reliant on income produced from property taxes. Conversely, some local governments have many different sources of revenue, reducing the need to have high property tax rates. Not all jurisdictions are allowed to levy property taxes. For example, some states fund county projects, while other states allow counties to levy property taxes to cover costs.

In other states, local governments run into financial challenges that can effect property tax rates. It is relatively common for local governments to take on significant obligations that, in turn, require significant revenue to fund. Local governments that are poorly managed can take on more debt than is prudent, requiring local officials to increase property taxes. Location, location, location, is an old saying in real estate that refers to the importance of an attractive area. However, location, location, location can also applies to property taxes. If you move to a local goverment that has large debts coming due, for example, you can expect to your property tax bill to increase.

Similarly, some local governments invest more in local services than others. Strong school districts, for example, are strongly correlated with higher than average property tax rates. Parents expecting to send their children to public schools may be willing to pay more in property taxes, but if you do not have kids, it might make sense to move to an area with a lower property tax bill.

How Do Property Taxes Work?

Property taxes are a particular type of tax associated with property values levied by local governments. Each local government will either have the authority to levy property taxes, or will not have the authority. It is common for state governments, county governments, and city governments to have taxing authority, but there are also lesser known goverment units that have the ability to independently levy property taxes, such as school districts, water reclamation districts, and mosquito abatement districts. Your bill adds together all of the different levies and presents you with a final property tax bill.

There are a few key variables that determine your property tax bill.

First is your assessment. Assessments are the value the county assessor assigns to your property. The assessor is normally an elected official responsible for running the office that determines how much your home is worth for tax purposes. Usually the assessor comes up with a new value every year through a process called reassessment, although there are some jurisdictions that are reassessed less frequently. The assessor determines the value of the property by reviewing recent sales nearby and then comparing them to how similar the recent sales were to each property. This process is usually done automatically, using software tools.

The second variable is the assessment ratio. The assessment ratio is the ratio of the home value determined by the assessor and the market value of the home. This has the effect of reducing how much you pay in property taxes because it lowers the value the property tax rate is applied to. Tax a home assessed for $100,000 and taxed at 1% of the assessed value. If there is no assessment ratio, the owner would pay 1% of $100,000, or $1,000. However, if there was an 80% ratio, the owner would pay 1% of 80% of $100,000, or $800.

The final variable is the millage rate. A millage rate is the amount per $1,000 of property value that is taxed, and can be thought of as the percentage your pay based on the assessed value. Each jurisdiction with the authority to levy property taxes sets its millage rate. The rates are then added up together, and used to create your final property tax bill. After you pay your bill, it is then split back up proportionally by millage rate and sent to the relevant taxing body.

Property Tax Exemptions

It is common for local governments to grant exemptions to different groups to reduce the cost of homeownership. They reduce the base value (the assessment variable referenced above) that the millage rate is applied too.

The most common exemptions are homestead and senior exemptions. The homestead exemptions is intended for owners who live in their home as their primary residence, as opposed to rental properties and larger multifamily and commercial buildings. In some places, there are also extra incentives for long-time homeowners. Senior exemptions are intended to reduce the burden of high property taxes for older homeowners. Homeowners will often qualify at around 60 years old.

There are also several other, less common, exceptions. Some jurisdictions give exceptions to veterans or veterans with disabilities. In addition, in some areas, people with disabilities can qualify for exemptions that reduce their property tax bill.

It is well worth checking if you qualify for exemptions, because they can often lower a homeowner's property tax by thousands of dollars.

How to Pay Your Property Taxes

Although different areas have different practices for how they collect property tax payments, homeowners will typically fall into one of two categories, escrow account payers and non-escrow account payers.

For escrow account payers, your property tax payments will be wrapped into your monthly payment, which includes payments associated with your mortgage, insurance, and property tax bill. The escrow account servicer is responsible for paying the property tax bill on your behalf and will manage the due dates to ensure it is paid on time.

For non escrow payers, you will be responsible for making direct payments to the county government. Depending on the jurisdiction payments can be collected on a monthly, quarterly, semi-annual, or annual basis. You can pay by check or online if your local goverment supports for electronic payments.

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State Property Tax Rates

Property taxes are one of the largest expenses a homeowner faces, and unlike many other expenses, they only go up over time. It's critical to fully understand what their impact can be on your home's monthly budget. The table below will help provide more information about how property taxes work in every state. Want to learn more about each state's property taxes? Check out out our state-specific property tax pages linked below

State Average Home Value Average Tax Bill Bill per $1,000
Alabama $158,151 $658 $4.16
Alaska $258,184 $2,725 $10.56
Arizona $214,099 $1,603 $7.49
Arkansas $139,001 $890 $6.40
California $479,695 $3,846 $8.02
Colorado $295,734 $1,867 $6.31
Connecticut $377,081 $5,869 $15.56
Delaware $262,855 $1,437 $5.47
District of Columbia $597,086 $3,486 $5.84
Florida $216,662 $2,330 $10.75
Georgia $189,862 $1,861 $9.80
Hawaii $571,176 $1,688 $2.96
Idaho $197,160 $1,505 $7.63
Illinois $228,377 $4,561 $19.97
Indiana $150,199 $1,364 $9.08
Iowa $152,964 $2,167 $14.17
Kansas $157,058 $2,135 $13.59
Kentucky $150,904 $1,215 $8.05
Louisiana $164,970 $832 $5.05
Maine $212,047 $2,524 $11.90
Maryland $343,936 $3,533 $10.27
Massachusetts $390,396 $4,442 $11.38
Michigan $152,236 $2,452 $16.11
Minnesota $221,036 $2,517 $11.39
Mississippi $132,374 $861 $6.50
Missouri $167,262 $1,729 $10.34
Montana $232,664 $1,786 $7.68
Nebraska $154,625 $2,700 $17.46
Nevada $212,539 $1,849 $8.70
New Hampshire $262,794 $5,186 $19.73
New Jersey $370,778 $7,800 $21.04
New Mexico $200,870 $1,320 $6.57
New York $384,145 $5,463 $14.22
North Carolina $195,670 $1,662 $8.49
North Dakota $161,401 $1,893 $11.73
Ohio $157,380 $2,511 $15.95
Oklahoma $144,572 $1,253 $8.67
Oregon $268,892 $2,756 $10.25
Pennsylvania $202,534 $2,980 $14.71
Rhode Island $292,262 $4,319 $14.78
South Carolina $185,189 $1,036 $5.59
South Dakota $162,368 $2,030 $12.50
Tennessee $179,423 $1,374 $7.66
Texas $176,000 $3,123 $17.74
Utah $249,230 $1,669 $6.70
Vermont $246,515 $4,111 $16.68
Virginia $306,110 $2,583 $8.44
Washington $310,277 $3,059 $9.86
West Virginia $129,128 $685 $5.31
Wisconsin $195,520 $3,516 $17.99
Wyoming $237,865 $1,349 $5.67