What Are Property Taxes and How Are They Calculated?

Property tax is a recurring levy imposed by local governments on property owners, based on the value of their real estate. Typically, property taxes are collected locally and fund local community services such as schools, roads, law enforcement and fire departments. The amount of the tax is usually determined by assessing the market value of the property and applying a specific tax rate, known as the millage rate. Homeowners can expect to pay property taxes annually or semi-annually, depending on the local jurisdiction. Understanding what property tax is and how it is calculated can help property owners anticipate and plan for these costs as part of their homeownership expenses.

A financial advisor can help you identify tax-saving strategies, including deductions or exemptions that you may qualify for as a homeowner.

How Are Property Taxes Calculated?

Property taxes are calculated based on the assessed value of the property, which is usually determined by a local assessor. The assessed value can vary depending on market conditions and improvements made to the property. It differs from appraised value, which aims to determine the fair market value of a property. Assessed value is often 20% to 40% lower than appraised value. A property owner who feels the assessed value is too high may be able to appeal the assessment and, with adequate documentation, convince the assessor to use a lower figure.

Once the value is established, a tax rate is applied to calculate the total property tax owed. This rate, often referred to as the millage rate, is determined by the local government and can vary between municipalities.

For example, if a property is valued at $200,000 and the local millage rate is 1.5%, the annual property tax would be $200,000 times 1.5% or $3,000. Some areas may offer exemptions or deductions that can reduce the tax burden. Homestead exemptions for primary residences represent an example of this. Older people also may be eligible for property tax reductions or exemptions.

How to Pay Property Tax

Paying property taxes is typically straightforward, and most local governments offer several options for payment. Property owners will receive a tax bill that includes the amount owed and the due date. Payments can usually be made online through a government portal, by mail or in person at a local government office.

Many homeowners who have a mortgage will find that their property taxes are paid on their behalf through an escrow account . In these cases, a portion of their monthly mortgage payment goes toward property taxes, which the lender then pays to the tax collector once or twice a year as appropriate.

When you are paying the tax directly, it's important to keep track of payment deadlines to avoid penalties, which can include interest or fees for late payments. If you are short of money when the bill comes due, some jurisdictions also offer payment plans for those who may have difficulty paying the full amount at once.

What Is Personal Property Tax?

In addition to real estate, some states impose a personal property tax on certain items that individuals and businesses own. Personal property typically refers to movable assets that are not permanently attached to land or buildings. This can include vehicles, boats, machinery, equipment and livestock. Local governments often assess the value of personal property annually, similar to the way real estate is evaluated for property tax purposes.

The rules and rates for personal property taxes also vary by state and locality. Some states may only tax personal property owned by businesses, while others tax both personal and business assets. Personal property tax bills are usually sent out separately from real estate tax bills, and payment is typically required annually.

Highest Property Taxes in the U.S.

The city of Rockford, Illinois, had the highest effective property tax rate in the country – 3.04% – among cities with 100,000 residents or more, according to a SmartAsset study conducted in 2023.

A city's effective tax rate refers to its median property tax bill as a percent of the median home value. In Rockford, for example, the median real estate tax bill in 2021 was $3,283, while the median home value was just $107,900.

Here are the 10 cities of 100,000 residents or more with the highest effective property tax rates:

1. Rockford, Illinois: 3.04%
2. Waterbury, Connecticut: 2.75%
3. Bridgeport, Connecticut: 2.67%
4. Aurora, Illinois: 2.60%
5. Elgin, Illinois: 2.53%
6. Rochester, New York: 2.51%
7. Syracuse, New York: 2.41%
8. Peoria, Illinois: 2.37%
9. Lansing, Michigan: 2.32%
10. Pearland, Texas: 2.31%

Property Tax Deductions

Homeowners who itemize their deductions on federal tax returns can often deduct property taxes paid on real estate. The deduction allows homeowners to reduce their taxable income by the amount of property taxes paid to state and local governments.

However, the total deduction for state and local taxes, including property taxes, is capped at $10,000 per year under the Tax Cuts and Jobs Act of 2017 . This deduction is especially beneficial to homeowners in high-tax states, as it can help offset the financial burden of property taxes.

Bottom Line

Property taxes play a significant role in local government funding. They are determined by property value and tax rates set by local jurisdictions. Taxes vary across regions, but often represent a considerable portion of property owners’ expenses. Calculating and paying property taxes follows a structured process, and many mortgage borrowers have the process handled by their loan servicers using escrow funds. Homesteads and senior citizens may be eligible for reductions or exemptions, and those who itemize their federal tax returns may be able to deduct property tax payments from income.

Tax Tips for Homeowners

• A financial advisor can work with you to take advantage of mortgage interest deductions and property tax deductions that could help reduce your taxable income. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• If you want to know how much your mortgage payments could be before buying a home, SmartAsset's mortgage calculator could help you get an estimate.

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