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How Does Property Tax Work?

Man at a desk calculating property tax

A Primer on Property Taxes

A property tax is levied on any real estate that you own, including homes, business properties, and vacant lands.

These taxes are calculated as a function of the value of your property. Unlike a federal tax, property tax is controlled and collected by state and local governments. These taxes are important sources of revenue for schools, infrastructure maintenance, and first responder services like police and firefighters.

Property tax rates varies widely from state to state and from one municipality to another. Some states, like New York and New Jersey, are known for high property tax rates while others tax real estate more modestly.

How is the value of your property determined?

The value of your property, often referred to as the assessed value, is determined by the local government responsible for real estate taxation. This assessment may be performed yearly or at more widely-ranging intervals. The assessed value is often based on the price that comparable properties have recently sold for.

After determining the market value, an assessment ratio is then applied, which varies from place to place and on the type of property that is being assessed. The net result is the assessed value of the property, which is the value that determines the property tax assessed to the property.

How is the tax rate applied?

Once your property is assessed, the property tax rates are applied to the assessed value. This results in the determination of the actual property tax that is levied.

Property tax rates are usually referred to as “mill rates” and they are expressed in tenths of a penny.  Simply put, a mill rate is the tax you will owe on each $1,000 of assessed value.
When do I have to pay property taxes?

Because property taxes are often administered locally, the procedures to pay and when to pay vary from place to place. In many parts of the country, the property tax can be paid annually. In some places, however, they may need to be paid semiannually or quarterly.

Keep in mind that if you have a mortgage, your mortgage company may collect specific monies from each monthly mortgage payment you make. This money is held in escrow and paid to the taxing authority by the lender themselves on your behalf.

Of course, if you own your property outright, you are responsible for paying the property tax yourself and on time.
Can I appeal my property tax assessment?

If you disagree with your property’s assessed value, you are able to lodge a dispute with the taxing authority. This is often referred to as a tax appeal and is frequently handled through the local tax assessor. Many people appeal their taxes, especially if they find them rising every year. Those who do appeal are often rewarded with a lower assessment and tax burden, depending on the facts they present to the assessor.
Are property taxes deductible from my federal tax return?

As indicated earlier, the federal government does not levy property taxes; this is done instead by state and local taxation authorities. Fortunately, if you itemize, you may be able to deduct your property tax against your federal tax burden.

State and local tax deductions (SALT deductions), which include the property tax, allow you to lower your federal taxable income. The current federal tax law limits these deductions to $10,000 or less.

In addition to deductions for individuals who itemize, many states allow deductions or grant lower property tax rates for certain people or groups. For example, veterans, seniors, and those in a low-income bracket are often beneficiaries of lower property taxes in many states.

Consult your tax advisor for full details.