How property taxes work

Property taxes are local taxes that apply to the value of your home or other real estate

Derek Silva

Derek Silva

Published December 11, 2019

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KEY TAKEAWAYS

  • Local governments control property taxes and the revenue is usually a significant part of local budgets

  • Property tax doesn’t usually apply to the full market value of your home

  • The taxable portion of your home’s value is its assessed value

  • Property tax rates are usually in mills, with the mill rate equalling $1 in tax per $1,000 in taxable value

Property taxes are taxes on the value of your real estate, including your home, business property, and vacant land. Some places also refer to their property taxes as an ad valorem tax. This is a type of tax where the amount you pay is based directly on the value of something.

The federal government doesn’t collect any property taxes. Instead, states, counties, cities, and other local governments control property tax. Revenues from property tax often make up a big part of local budgets and help to fund things like schools, police and fire departments, and road maintenance.

Property tax rates vary greatly across states and even within states. The process of collecting taxes can also vary, but the general process is the same. A local government official determines the value of your home and then property tax applies based on your area’s tax rate. Tax rates are usually expressed as a mill rate, which equals $1 in tax per $1,000 in assessed value.

In this article:

How property taxes work

The general process behind property taxes is simple: Your locality (usually the county) determines the value of your home and then you pay taxes based on that value.

However, the exact process is a lot more complicated in certain areas because each local government sets its own process. Below, we go over the basic process.

Determining the value of your home

The first part of property taxes is determining the value of your property.

First, an assessor or appraiser determines the market value of your home. An appraiser typically handles all the homes in a county and when they assess your home value depends on where you live.

Property appraisals may happen once per year, once every three years, or even less frequently. They usually consider the values of similar homes that were recently sold in your area. They may also adjust your home's value based on things like construction permits you got from your city or general home appreciation in the area.

Market value is the amount you could sell your property for on the open market. Most places do not tax you on the full market value of your home. You may also see the terms fair market value or FMV.

(See how much home you can afford with our free mortgage calculator.)

After finding market value, tax assessors apply an assessment ratio. The assessment ratio is the percentage of your property’s market value that is actually subject to tax. Ratios vary by location. For example, West Virginia generally only taxes homeowners on 60% of their home’s market value, and Ohio has an assessment ratio of around 35%.

Assessment ratios also differ based on the type of property you have. The rate for personal property (your home) is probably different from business property. Different types of property may be called classes.

Assessed value is the value you actually pay tax on. Some places also call this the taxable value. Let’s say your home’s market value is $250,000 and your area uses an assessment ratio of 60%. Your home’s assessed value would be $150,000 ($250,000 x 60%). Your property tax rates would then apply to that $150,000.

If you ever disagree with your property’s assessed value, you can probably dispute it through assessor’s office.

Applying property tax rates

Once the local appraiser has your home’s assessed value, they can apply the actual property tax rates. Counties and cities often set property tax rates annually. Check with your state’s comptroller or tax department to find the local tax rates.

Property tax rates are usually expressed in millage rates or mill rates. A millage rate is the amount of tax you pay per $1,000 of home value. Mills are expressed as tenths of a penny ($0.001), and one mill equals $1 in tax for every $1,000.

You can calculate your tax bill by multiplying the millage rate by your home’s assessed value and then dividing by 1,000. Another way of looking at it is to first convert the millage rate to a dollar rate by dividing the mill rate by $1,000.

As an example, let’s say your local millage rate is 7.5 and your home’s assessed value is $150,000. The millage rate means you will pay $0.0075 in tax for every $1,000 in home value. (You can see this by dividing the mill rate by $1,000.) This rate then applies to your home value. In this case, your tax bill would be $1,125 because $150,000 x $0.0075 = $1,125.

Millage rates are confusing, so it’s understandable if you don’t get them at first. The key information is that one mill is one tenth of a penny and a tax rate of one mill is equivalent to $1 in tax for every $1,000 in home value. (The term millage comes from the latin word for “thousandth.”)

When & how to pay property taxes

Some places collect property taxes quarterly, semi-annually, or annually. Similarly, how you pay depends on where you live. You may pay directly to your state’s tax agency, such as on your state tax return. In some cases you make payments into an escrow account that your mortgage lender then uses to pay your property taxes.

Payments for tax bills often work similarly to public utilities, with the ability to pay online. A credit card or debit card payment may result in a convenience fee.

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Are property taxes deductible?

Many states allow certain people and groups to deduct some or all of their property taxes. On the other hand, some states simply lower your tax bills, through tax credits, and don’t offer a deduction on your tax return. (Check out our guide to tax credits vs tax deductions.)

People who usually receive lower property tax rates or deductions on their tax returns include low-income individuals, seniors, veterans, and those with disabilities. There are also some homestead exemptions for people facing bankruptcy or situations where someone’s spouse passes away. Religious organizations often face lower tax rates.

These tax deductions commonly apply to a certain amount of a home’s assessed value. For example, the first $40,000 of assessed value may be exempt from tax, but all value above that is taxed normally.

Federal property tax deductions

Property taxes do not go to the federal government, so there are not many property tax deductions on your federal tax return. The exception is that if you itemize your deductions, you may be able to claim the state and local income tax deduction, also called the SALT deduction.

The SALT deduction allows you to lower your taxable income based on the amount you spend toward state or local income tax, property tax, and sales tax. Since 2018, there is a cap of $10,000 on the SALT deduction.

Taxpayers who itemize can also claim the mortgage interest deduction.

States with the highest & lowest property taxes

It’s difficult to compare property tax rates across the country because taxable home values vary wildly. To get around this we looked at effective property tax rates. An effective property tax rate is how much someone paid compared to the value of their home. Regardless of how assessed values and millage rates differ in two areas, you can still compare how much they paid as a percentage of their total home value.

The table below uses U.S. Census Bureau data to calculate the effective property tax rates for every state. A higher rate means higher average property tax bills. The state with the highest effective tax rate is New Jersey at 2.43%, and the state with the lowest tax rate is Hawaii at 0.27%.

StateMedian annual property taxes paidMedian home valueEffective tax rate
Alabama$591$147,9000.40%
Alaska$3,250$276,1001.18%
Arizona$1,517$241,1000.63%
Arkansas$815$133,1000.61%
California$3,963$546,8000.72%
Colorado$1,808$373,3000.48%
Connecticut$5,889$277,4002.12%
Delaware$1,472$255,3000.58%
District of Columbia$3,539$617,9000.57%
Florida$1,938$230,6000.84%
Georgia$1,712$189,9000.90%
Hawaii$1,730$631,7000.27%
Idaho$1,478$233,1000.63%
Illinois$4,480$203,4002.20%
Indiana$1,214$147,3000.82%
Iowa$2,354$152,0001.55%
Kansas$2,203$159,4001.38%
Kentucky$1,239$148,1000.84%
Louisiana$912$167,3000.55%
Maine$2,579$197,5001.31%
Maryland$3,456$324,8001.06%
Massachusetts$4,790$400,7001.20%
Michigan$2,387$162,5001.47%
Minnesota$2,542$235,4001.08%
Mississippi$960$123,3000.78%
Missouri$1,546$162,6000.95%
Montana$2,014$249,2000.81%
Nebraska$2,689$161,8001.66%
Nevada$1,640$292,2000.56%
New Hampshire$5,641$270,0002.09%
New Jersey$8,353$344,0002.43%
New Mexico$1,354$174,7000.78%
New York$5,525$325,5001.70%
North Carolina$1,453$180,6000.80%
North Dakota$1,971$198,7000.99%
Ohio$2,296$151,1001.52%
Oklahoma$1,237$140,0000.88%
Oregon$3,140$341,8000.92%
Pennsylvania$2,871$186,0001.54%
Rhode Island$4,288$273,8001.57%
South Carolina$939$170,8000.55%
South Dakota$2,159$171,5001.26%
Tennessee$1,205$177,5000.68%
Texas$3,216$186,0001.73%
Utah$1,778$303,3000.59%
Vermont$4,297$233,1001.84%
Virginia$2,261$281,7000.80%
Washington$3,579$373,1000.96%
West Virginia$727$121,3000.60%
Wisconsin$3,267$188,5001.73%
Wyoming$1,372$230,5000.60%

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