How property taxes are calculated

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How are property taxes calculated? Crunching the numbers may not be as fun as adding up the earnings from an investment, but understanding the details of your property tax assessment and bill is essential as a homeowner.

What are property taxes?

Property taxes are exactly what they sound like: They’re the bill from your city or town for owning property. Whether you own a condo, a townhome or a mansion, you have to pay property taxes. Those taxes, in turn, pay for your city and county to function by helping cover the costs of public services such as schools, the police department, emergency services and sanitation workers.

Property tax rates vary around the country. According to an ATTOM Data Solutions analysis of more than 86 million single-family homes in the U.S., Illinois had the highest average property tax rate in 2019, 2.22 percent, while homeowners in Hawaii enjoyed sun, sand and the lowest property tax rate, at just 0.36 percent.

Rates differ from county to county, as well. For example, 2017 property taxes in Georgia ranged from just $506 for homeowners in rural Treutlen County to $2,761 in Fulton County (which includes Atlanta), research from the Tax Foundation shows.

How are property taxes calculated?

Your property tax bill is based on three key factors:

  • The assessed value of your home
  • The assessed value of all the other homes in your tax jurisdiction
  • Your local government’s annual budget

Those numbers all work together to determine the tax rate, also known as the mill levy. The mill levy is determined by dividing the dollars needed for local services by the assessed property value in the service area, according to Mike Ardis, senior director of communications, technology and publications at the International Association of Assessing Officers (IAAO).

For example, consider a local government that needs to collect $5 million in property taxes. The assessor finds that the collective value of all the homes in the jurisdiction is $400 million. The mill levy is determined by dividing $5 million by $400 million for a rate of 1.25 percent. In this scenario, if your property’s assessed value is $500,000, you’d pay $6,250 in property taxes.

What is the assessment process?

The value of your home plays an essential role in your property tax bill. According to the IAAO, the assessment process begins with the attributes of the property, such as total square footage, the number of bedrooms and bathrooms and amenities such as fireplaces or a swimming pool.

Location also plays a big role in determining value, but the assessor does not visit every home. Instead, he or she uses a mass appraisal system that analyzes sales, income and cost data. Ardis says that in some cases, an individual appraisal may be required.

What causes property taxes to rise?

Property taxes can rise due to a number of factors. The most obvious is if your home’s assessed value increases. For example, if you add on another bathroom, install a back patio or add a hot tub, you’ll be able to enjoy your time at home more, but you’ll also likely pay more for that enjoyment.

The value may go up without you making any changes to your home, as well. If your neighborhood becomes more desirable and more people want to live next door, your property taxes are bound to rise.

Property taxes can also increase thanks to a place that may be many miles from your front door: city hall. If your city is facing a budget shortfall, you as a homeowner may be on the hook to help make up the deficit. The fallout from COVID-19 has already created a troubling scenario for local governments that could have a trickle-down impact on homeowners. In one recent development, the city of Nashville approved a 34 percent increase in property taxes in response to monetary challenges from the pandemic. In other places, local governments have offered property tax relief.

While some homeowners may see unwelcome surprises on their property tax bills for these reasons, some jurisdictions have protections in place to avoid drastic increases. According to the Tax Foundation, the majority of states and Washington, D.C., have some type of limitations in place to restrict property taxes from increasing too much or too fast.

How to pay property taxes

If you’re making a mortgage payment, there’s a good chance you’re already paying your property taxes. Mortgage lenders generally estimate your annual property taxes and build them into your monthly bill. That amount accrues in an escrow account, and when your property taxes are due, the money is already set aside there — you don’t have to do anything else.

Keep in mind that if you’ve paid off your mortgage, you still have to pay property taxes. Generally, your city will offer plenty of ways to pay — online, over the phone or by mailing a check.

Featured image by buzbuzzer of Getty Images.

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Written by
David McMillin
Contributing writer
David McMillin writes about credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
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