Property Taxes: What Are They and How Are They Calculated? (2023)

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Only two things are certain in life: death and taxes. Unfortunately, taxes tend to pop up in unexpected places. From the teen who discovers that taxes are pulled from their first paycheck to new homeowners who need to build property taxes into their monthly bills. 

Understanding how property taxes work is a big part of buying a house. Once you have a clear picture of your tax options, you can more effectively budget the home price you can afford. There are multiple ways to pay your property tax and even opportunities to reduce your overall tax bill. Use these frequently asked questions to learn everything you need to know about property taxes. 

What is a property tax?  

A property tax is levied on the value of the house or the land you own. Property taxes vary by state, with some areas taxing by square footage in the home and other areas taxing by acreage. Tax law can quickly become complex, with some regions counting patios and porches in the square footage calculations with other states only taxing air-conditioned rooms. 

Property taxes usually increase as the value of the home increases. For example, a two-bedroom cottage will have a smaller tax bill than a seven-bedroom mansion. Tax bills can also fluctuate over time. If your home was worth $200,000 when you first bought it and now it is worth $400,000 then your tax bill could increase.  

How do you pay property taxes? 

You have multiple options for paying your property tax. The first choice is to log into your city or county governing body and pay online. This is actually the hardest way to pay your taxes. You will need to cover your tax bill in a lump sum annually, which could be thousands of dollars depending on where you live. 

Most homeowners opt to pay their property taxes through their mortgage company. The lender pays your tax bill and divides the cost over the course of the year. For example, if your tax bill is $3,600 annually then your lender will add $300 to your monthly payment. The same process can be done for your homeowner’s insurance and HOA fees. 

Letting your lender handle your property bills is the easier option because you never have to worry about making payments to your local government. However, these monthly costs can add up. What starts as a $1,000 monthly payment to your bank can quickly increase to $1,800 once your taxes, insurance rates, and HOA fees are included. Without realizing it, you might price yourself out of a home because your debt-to-income ratio is too high. 

How is property tax calculated?

You can decide how involved you want to be with the property tax calculations in your area. Some people look up city and county tax laws to see exactly where the governing bodies get their tax estimates and what deductions are possible. Here’s how to do it: 

• The first step is to evaluate the value of your property – which is usually done by measuring the square footage and completing an appraisal. 
• Next, apply any deductions from the value of the property. Like income tax deductions, these elements will lower the amount of taxable income. Homeowners receive deductions for living in a primary residence, serving in the military, or having a disability. 
• Finally, you can apply the tax rate to your calculated value. This can give you an estimate of your bill. Tax rates are often represented in mileage, or the rate you pay per $1,000. If your tax bill is $2 per $1,000 in home value, the mileage would be written as 0.002. 

For example, if you recently purchased a property for $500,000 and qualify for $20,000 in exemptions, your taxable home value is $480,000. If the mileage rate is $5 for every $5,000 of your home’s value, then your bill would be around $2,400 annually (0.005 x 480,000). From there, you would pay $200 to your lender each month to cover this bill.   

>> AGENT ANSWERS: Do you pay taxes when you sell a house?

In the example above, the $20,000 exemption saved you (the homeowner) about $500 per year in taxable income. Your cost for the full $500,000 would be $2,500. 

What is a homestead tax exemption? 

Homestead tax exemptions are created on the state level and are meant to reduce the overall tax burden on homeowners. The guidelines to qualify vary by region but most have one main rule: this needs to be your primary residence (as opposed to a second home, vacation home, or rental/investment property). Some states have restrictive homestead exemptions that are only for people with disabilities or veterans. Other states offer discounts to any buyer of a primary residence. 

Look at Florida as an example. This state has the country’s largest stock of second homes, with 1.04 million properties (accounting for 10.8% of all homes in the state). This state also has a generous homestead exemption policy, where owners can deduct up to $50,000 of their home’s fair market value from their tax bill. This allows first-time homebuyers to have a lower tax bill and enter a competitive buyer’s market. 

Talk to your Realtor about this tax exemption if you are buying a primary residence. Your property tax rates might be lower than you expect once you factor in the state incentives to buy in the area. 

How can you find the property tax rate for a home? 

Talk to your Realtor about the property tax rates in your area. They should provide an estimate based on the types of homes they are showing you. 

When you attend a showing or open house, the annual tax payments should be included in the home’s fact sheet – along with estimated home insurance and HOA costs. Tax information is also public knowledge (in most areas) so you can search your local property records to see what the tax bill is for certain houses. 

The amount that the current homeowner pays might not be your tax bill. Taxes are calculated based on the property’s assessment and the sale price could lead to a higher property bill. You also might be able to apply certain homestead exemptions that lower your monthly tax costs that the previous owner didn’t qualify for. 

What is the difference between property taxes and real estate taxes?

In the vast majority of cases, you can use the terms property tax and real estate tax interchangeably. The IRS uses the term real estate tax but most Realtors and tax professionals use the term property tax. Your local municipality might also use the term property tax as well. 

Can you contest your property tax bill?

If you believe that your bill is higher than it should be, you can appeal it to your local governing body. Every city or county has specific appeal guidelines and dates when you can contest your bill. You can only contest the assessed value of your home and any exemptions you were denied. You cannot contest the mileage (tax rate) of the home – everyone pays the same rate. 

For example, if your home was valued at $400,000 one year and $500,000 the next, you might contest the appraised value because that is a significant increase in a short period of time. Similarly, if your veteran status exemption is not included in the tax bill, you can contest that exclusion as well. 

What do property taxes fund? 

Property taxes fund local projects and services. In most cities, taxpayers fund schools, roads, the fire department, EMTs, parks, community centers, and other essential city elements. 

Taxes are meant to be transparent. You should receive a notice each year that reviews your tax bill and shows where this revenue goes. (For example, five percent to schools, three percent to roads, etc.) You will receive this notice even if your mortgage company covers your taxes and the mailer should clarify that the document is not a bill. 

If you want to know what your property taxes go toward, reach out to your local government office. The property records office should have the information you need. 

Do you pay property taxes on the sale of your home?   

If you are preparing to buy a primary residence, you likely won’t have to worry about paying taxes on the sale of your home. The Capital Gains Tax applies to the profits from your home sale; however, this tax only kicks in if you lived in your primary residence for less than two years and earned more than $250,000 on the home sale for individual filers. This is a very high-level view of the capital gains tax but highlights how it isn’t an issue for most sellers. 

>> AGENT ANSWERS: Are second homes taxed differently?

Ask your Realtor about paying this tax if you aren’t buying a primary residence or if you think you might be on the hook for this bill. 

An Experienced Realtor Understands Property Taxes

If you are preparing to buy a house, talk to prospective Realtors about property taxes in your area. They should be able to provide a general estimate for tax rates based on the home size you are interested in. They can also give you information on how to look up tax rates in your area and find exemptions. 

To find a Realtor, turn to FastExpert, the #1 trusted platform to search, compare and hire real estate agents. We only let the top Realtors in each area join our referral system so we know our customers are working with the best. Try FastExpert today (it’s free!) and meet some of the top real estate agents in your area. Happy househunting. 

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