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- Property taxes are expressed as millage rates, or an amount per $1,000 of assessed value.
- A home’s assessed value for property taxes may differ from its market value.
- The local tax authority will determine your assessed value, but you may be able to contest it if you believe it’s excessive.
- See Personal Finance Insider’s picks for the best tax software »
If you own your home, property taxes are just a part of life. And, depending on the size and value of your home and your local property tax rates, they can be one of the costliest parts, amounting to thousands or tens of thousands of dollars a year.
Because property taxes can be a significant expense, it’s essential to understand how they’re calculated, your local rate, and how your tax bill might change over time. It’s equally important to know these things when you’re considering buying a home.
“You definitely want to call the title company and understand what that tax payment will be,” says Polina Ryshakov, senior director of research and lead economist at Sundae, an online real estate marketplace that matches investors with people selling distressed properties. “I think the most important thing is to understand whether the tax will be reassessed every year and by how much.”
How to calculate property tax
Property tax assessments are based on your home’s assessed value multiplied by a millage tax, which is a certain amount for every $1,000 of property value. The mill levy is $1 per $1,000 in property value, so that the mill levy rate will be expressed as a whole number.
For example, if your property tax rate is 25 mills, you’ll owe $25 for every $1,000 in assessed value. Expressed as a percentage, a mill levy of 25 is 2.5%.
Your home’s assessed value for property taxes may differ from its market value. The market value is how much you could get if you sold your home. The assessed value reflects the property tax assessor’s estimate of your home’s value, which may or may not match the market value.
Fortunately, you don’t have to calculate your property tax the way you do your income taxes. Instead, you’ll get a bill every year from the tax assessor.
Ways to assess your property’s value
There are three common ways that appraisers determine home values.
- Sales comparison method: This method uses recent sales of comparable properties (comps) to determine the value of your home. It works well when there are a lot of homes selling in your area. When the market is stagnant, or your neighbors don’t often sell, it can be difficult to get accurate comps to determine your home’s value.
- Replacement method: Also known as the cost approach to real estate valuation, this method adds the value of the parcel of land to the value of the improvements (structures) on it to determine your property’s value.
- Income method: If you own income-generating property, the income method is the proper way to assess its value. This approach combines sales comparisons to determine the rate at which similar properties are appreciating in value (called the capitalization rate) with the income the building generates. To calculate valuation, divide the net income by the capitalization rate.
For the most part, however, you don’t have a say in how your property value is assessed for tax purposes. Your home’s assessed value is determined by your local tax assessor. Because tax assessors are responsible for determining the value of hundreds or thousands of properties each year, they aren’t able to do the kind of in-depth analysis that an appraiser will when you sell or refinance.
Property tax assessors use various methods to determine home values, such as price per square foot or home price appreciation in your region, zip code, or census tract. “It depends what kinds of tools they have. Some are more savvy than others,” Ryshakov says. “In some states, they will do some kind of a desktop valuation, but not a full appraisal.”
However, if you feel your property value was set too high, you can contest your tax bill. The algorithms assessors use can make mistakes, and sometimes the authorities have the wrong bedroom or bathroom count for a property. “People should be mindful of any tax increases that make no sense, year over year,” Ryshakov says.
Local differences in property tax assessment
Ryshakov notes that some jurisdictions update their assessments every five years, giving you a predictable tax bill until the following assessment. Howeve, in some places, such as Texas, homes are reassessed every year. If real estate prices escalate quickly (as they have in many Texas cities), your tax bill can blow up. “Some of the people who move to Texas are in for a big surprise,” she says. “What they are paying today is not necessarily what they will be paying tomorrow.”
In California, Proposition 13 created a different property assessment system from other states. When you buy, your home is assessed at your purchase price. After that, the assessed value can only increase by a maximum of 2% annually, though local governments can add on parcel taxes. Your property’s assessment won’t revert to market value until you sell in California, though you may get reassessed if you renovate your property.
When it comes to figuring out your tax rate, Ryshakov says, “It’s very state-, county-, and even municipality-specific. Know your market. Know what’s going on. A lot of people get in trouble because they don’t know.”
Putting it all together
Here are the steps to calculate your property tax:
- Find out your home’s assessed value by contacting your local tax assessor’s office. In some cases, you can find out the assessed value by entering the block and lot number on the assessor’s website.
- To determine the mill levy rate for your property, the best source once again is the local assessor’s office. The title company will also have this information if you are just purchasing the property.
- Convert the mill levy rate to a percentage to make it easier to calculate. To turn your mill rate into a percentage, just move the decimal one place to the left. For example, a mill rate of 18.5 equals a property tax rate of 1.85% of your assessed value. Another way to calculate the amount of tax in this example is to multiply your assessed value by 0.0185.
- Using the millage rate above, a home assessed at $300,000 would have a tax bill of $5,550. The formula is: Assessed value ($300,000) x millage rate (1.85%, or 0.0185) = property tax ($5,550)
You can pay property taxes annually, semi-annually or monthly. Even if you pay annually or semi-annually, it’s a good idea to break down the monthly expense and set the funds aside so they are available when your tax bill is due. In the example above, you’d need to set aside $462.50 per month toward property tax. In some cases, your mortgage lender may require you to pay 1/12 of your estimated property taxes with your monthly mortgage payment. The funds go into an escrow account, and your mortgage servicer will pay the taxes for you.
The financial takeaway
Property taxes will be an annual expense as long as you own your home, even after you pay off your mortgage. Educate yourself about property tax rates and reassessment practices before buying a property in a new state or city to avoid property tax sticker shock.
Most importantly, make sure you have money set aside to pay your property taxes. Outside of extraordinary circumstances, failure to pay your property taxes in full could cause you to lose your home.