What are property taxes?
Property taxes are paid by property owners and help cover costs for services in a community, such as public schools, emergency services, the police department and road maintenance. If no one paid property taxes, those potholes might never be fixed, and the high school down the street might not be able to open its doors.
Property taxes are important: They accounted for $547 billion worth of revenue for state and local governments in 2018, according to the Urban Institute — higher than the revenue derived from sales taxes, income taxes and corporate taxes.
For most homeowners, their second-largest expense after the mortgage is property taxes. The cost of property taxes varies from place to place, as local governments set property tax rates. In 2020, the average property tax on a single-family home was $3,719, according to an analysis by ATTOM Data Solutions. In Acadia County, Louisiana, the average property tax was barely noticeable, at $456. In Marin County, California, by comparison, taxes were more than $13,000.
Sky-high property taxes can make homes unaffordable for retirees living on fixed incomes, as well as people who lose a job, go through a divorce or take a major hit to their income for some other reason. They can also influence the housing market, making it tougher for entry-level buyers to afford neighborhoods with higher property taxes.
How property taxes are calculated
Depending on your jurisdiction, your property tax is typically calculated as a percentage of either the fair market value or the assessed value of your property. The difference between the assessed value and the fair market value is that the former is determined by an assessor solely for the purpose of collecting taxes. The fair market value is essentially the selling price of the property based on what sellers and buyers agree to for similar properties in your area.
While you’ll pay property taxes annually or semiannually, your property might not be assessed every year. For example, in Cook County, Illinois, different sections of the county are reassessed every three years. Assessments are often based on statistical modeling instead of in-person evaluations.
If a homeowner thinks their property is overvalued, they can dispute the assessment, says Adam Wogsland, a real estate attorney at SW&L PC in Fargo, North Dakota.
“You have the right to appeal,” Wogsland says. “In Fargo, you can call up and dispute the appraised value of your home. They don’t usually change it based on a phone call, but you can try.”
Ways to pay property taxes
Are property taxes included in a mortgage? Many homeowners put money toward their property taxes every month via their mortgage payment. Although the extra money is tacked onto the mortgage payment — usually arranged by your mortgage lender when you buy your house — it’s a separate bill. Your lender or servicer puts the tax money into an escrow account until it’s time to pay.
If you’re a homeowner and aren’t sure if property taxes are part of your mortgage payments, ask your lender or servicer, and get the information in writing. If your property taxes are in escrow, your lender should send you a Form 1098 each year.
If you don’t have an escrow account set up with your lender, most counties will take your property tax payment via mail, phone or online. Check with your local tax collector to find out how and where you can make your payment.
Depending on where you live, the tax bill could come in twice a year or even more. For example, in New York, some residents get quarterly bills and others get them semiannually; the frequency depends on the assessed property value.
While splitting up the payments can be helpful for your budget, paying one lump sum might make a difference. In New York, you’ll get a discount on your property taxes if you pay the entire year in advance.
If you have paid off your mortgage, keep in mind you still have a responsibility to pay your property taxes.
Deducting property tax under the new tax code
While you have to pay for property taxes, your payments might help you save some money on your other taxes. Property taxes can be deducted from your income for federal taxes if you itemize your deductions.
Taxpayers who itemize their deductions do so because they stand to get more money back than they would if they took a standard deduction. They use a Schedule A form to show how much money they spent on each line item. These items include medical expenses, gifts to charity and state and local taxes (SALT). The SALT deduction is currently capped at $10,000.
If you do not itemize your deductions, you can take the standard deduction. In 2021, the standard deduction is $12,550 for individuals, $18,800 for those filing as head of household and $25,100 for married couples filing jointly.
Property tax exemptions
There are several types of property tax exemptions. For example, in Texas, a homestead exemption — which only applies to primary residences — could help you save on your property tax bill. These exemptions vary, but might look something like this: If your home is appraised at $200,000 and you qualify for a $25,000 exemption for school taxes, you will pay taxes as if your home is worth $175,000.
There are also exemptions offered to the blind, the elderly, veterans and property owners experiencing hardship. The eligibility requirements and the amount of the exemption depend on where you live.
In some places, homeowners can get reductions on property taxes for several reasons, including installing renewable energy systems and buying older homes and rehabbing them.
Because these programs vary by jurisdiction, contact your local tax collector to find out if you’re eligible for a reduction or an exemption.
What if you can’t pay your property taxes?
Property taxes, mortgage payments, utilities and more — the list of expenses for your home can be overwhelming, and property taxes might seem like a cost you can skip if you’re strapped for cash. However, paying your property taxes is just as essential as every other bill for your home, and ignoring them can result in a lien on your property, fees piling up and possible foreclosure.
If you can’t afford your property taxes, contact your lender or servicer as soon as possible to discuss the situation, says William Heyman, a real estate attorney at Heyman Law Firm in Maryland. Some lenders have programs that can help homeowners pay their taxes over time.
Other options include borrowing money from friends or relatives or tapping your home’s equity. If you’re age 62 or older, another possible solution is a reverse mortgage, where a lender makes monthly payments to you against the value you have in the home.
“If they have equity in their house but are unable to pay their taxes, they should consider refinancing and using that money to pay their taxes, although this is not a long-term solution,” Heyman says. “If their situation is bad enough, they should consult with a bankruptcy attorney.”
It’s better to sell the home than to lose it in foreclosure, so if the taxes are unaffordable, talk to a real estate agent. Even if there’s a lien already on your home due to unpaid taxes, an agent can help you work out a deal so the new owner pays the taxes, perhaps in exchange for a lower sale price.
For those who inherited a house with hefty property taxes, some jurisdictions offer programs to assist, Heyman points out.
When in doubt, talk to a professional — either an accountant, an attorney or a counselor who can guide you through the often-confusing world of taxes.
Finally, if you haven’t received a property tax notice for a while, it’s time for a checkup. When Cook County officials planned to auction homes with unpaid property tax bills in 2019, estimates showed that 21,000 of the 57,000 homes at risk were unaware they even owed money due to mailing errors. Make sure your address is properly updated with your local officials to avoid any potential confusion or failure to pay.