How Property Taxes Are Calculated

Real estate property taxes are a considerable source of revenue for local governments within the U.S. These funds are used to improve important public facilities such as schools, libraries, and fire stations. Vital infrastructure like roads, sewers, and bridges are also supported by property taxes.

The property tax rates, which are represented in percentages and sometimes called millage rates, are typically decided and collected by local governments such as city councils or county commissions. A “mill” is one dollar for ever $1,000 in value. Each year, typically around September or October, governing bodies conduct budget hearings in order to determine how much revenue they will require to maintain their operations for the next year. The tax rate is subsequently calculated by dividing the board’s total taxes by the entire assessed value of the jurisdiction.

Each state has different laws governing real estate and property tax. However, the way in which property taxes are calculated is fairly standard. Typically, the process involves multiplying the prevailing tax rate by the assessed value of a property. Any existing exemptions are deducted from the resulting figure. Approximately 40 states give certain credits or homestead exemptions which can lower a property’s taxable value.

One of the most important factors in determining property tax is the assessed value of the property. In order to find the assessed value, an assessor estimates the market value of a property or the likely sale price in the real estate market. The assessor will conduct studies and analyze the local real estate market. The assessment also includes considerations such as new construction, home improvements, and demolitions.

As a homeowner, you can get an idea of your property’s market value based on the sale prices of similar properties in your area. If it seems that your assessment is too high, you have the opportunity to have the value reduced through an administrative property tax hearing or by consulting with your assessor or a local property tax consultant.

In determining a property’s assessed value, the actual value is multiplied by the assessment rate which varies in each jurisdiction. For example, if the value of a home is $140,000 and the assessment rate is 8 percent, the assessed value would be $11,200. Meanwhile, in figuring the property tax for the same $140,000 home, with a tax rate of 25%, multiply the assessed value by the tax rate ($11,200 x .025). This results in a property tax burden of $2,800.

Always remember that property taxes are due annually and failure to pay could mean penalties. You should learn as much as possible about property taxes and other related tax breaks and relief that will save you money.