Property Tax: What It Is And How It’s Calculated

By Bill Lyons | Updated on February 5, 2024

Property taxes are paid to the government to ensure projects such as community services, schools, and fixing the roads. How much property tax you pay will depend on where you live and your home’s value. However, all homeowners pay property taxes, so it’s important to budget for more than your principal and interest when paying your mortgage. 

Being a homeowner means having more financial responsibilities. If you purchase your home with a loan, you’ll pay a monthly mortgage bill which typically includes your principal and interest, homeowners insurance, and property tax. Of course, some lenders don’t roll your property tax into the mortgage payment, so you’ll need to understand what property taxes are and how to pay them. But what is property tax, and how does it affect homeowners? 

Understanding property taxes, including how they work and how they’re calculated, can help you budget better for your home. It can also be an effective method to create a budget for prospective homeowners to help them determine how much of a home loan they can get from a lender. This article will discuss property tax meaning and definition, how they work, and how they’re calculated to help you better understand your budget. 

What Is A Property Tax?

Homeowners pay property taxes to local state and city governments. They’re used to fund community and local projects, including schools, community amenities, police, firefighters, and safety workers, public parks, streets and roads, and other local projects. 

Property Tax vs. Real Estate Tax

Property tax definitions vary by state. However, in most cases, property taxes and real estate taxes refer to real estate. However, not all property taxes are real estate taxes. 

For example, many state governments require property taxes on other pieces of personal property, like vehicles. Still, most people consider property taxes and real estate taxes the same thing, so these terms are often used interchangeably. In both cases, the money collected from property and real estate taxes funds local projects and community amenities. 

How Does Property Tax Work?

How property taxes work depends on where your home is located. They may be paid annually or biannually, depending on your state. Property taxes are due twice a year in many states, but you can pay them in a lump sum. In addition, when your property tax is due depends on where you live, as municipalities around the country have different timelines for collection. 

In addition, most mortgage loans have property taxes rolled into them and put in an escrow account, so every month, you’ll pay a portion of your property taxes. When your local municipality requires you to pay taxes, your mortgage lender will receive a notice and pay it for you since they’ve been collecting it. 

For example, if you have an FHA loan for first-time home buyers, your property tax is typically rolled up into your mortgage payments. However, this isn’t true for all property taxes, so you’ll need to discuss this with your lender to determine whether having your property tax payments rolled into your mortgage is a good idea. In most cases, if you put more than 20% down on a loan, your lender may not require you to add property taxes to your payments. 

If you own your home outright, you’ll pay your own taxes, so it’s important to know how to pay them and when. If you’re unsure when to pay property taxes, don’t worry; you will receive a notice in the mail when it’s time to pay. Most cities make it easy and convenient to pay your property taxes, and you may do so online, over the phone, or via mail. 

The good news is that property taxes are typically deductible (up to a certain amount) on your tax returns, which can help you reduce your tax burden during the years you own the home. 

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How Property Tax Is Calculated

How much you pay in property taxes depends on where you live, but they’re effectively determined using the property value and the city’s tax rate. Changes to your property can affect your property tax amount since it’s closely tied to the value of your home. However, local officials decide the tax rate in their municipalities. But how is property tax calculated? Let’s take a look. 

Calculate Your Property’s Assessed Value

The local government sends an assessor to determine your property’s value. They may do this annually or every few years to determine how much your home is worth based on various factors. Some municipalities use your home’s market value as the assessed value, while others use the appraised value at any given time. 

Unfortunately, the assessed value is not the same value you paid for the home or how much you can sell it for; in most cases, it’s much lower than the market value, which will reduce your tax burden. They’ll then multiply your home’s value by the assessment ratio—a taxable percentage of the home value. These ratios vary, so if you want to learn yours, you can look at your city’s website or talk to your mortgage lender. 

There are also property tax exemptions available for some homeowners, including:

• Homestead: A homestead exemption is for homeowners who live on the property full-time; it’s their primary residence. 
• Senior Citizen: Some municipalities have a senior citizen exemption which offers discounts on property taxes. 
• Homeowners with Disabilities: Disabled homeowners may be eligible for an exemption that eliminates or at least reduces their property tax liability. 

Remember, every local government has different rules and exemptions, so you can discuss them with your accountant or tax preparer to learn about your options. 

Multiply By Your City’s Tax Rate

An easy way to determine your home’s assessed value is by looking at your recent tax bill or looking at other properties in the area on the assessor’s website. Once you have this information, you can multiply it by your city’s tax rate to tell you how much you’ll owe in property taxes. 

Property taxes are typically written as millage rates, so you should find your county’s mill rate and divide it by 1,000 since every $0.001 mill rate means you’ll pay $1 for every $1,000 of your home’s assessed value. Then, you’ll multiply the mill rate by the home’s assessed value to find your property tax liability. 

Let’s look at a simple example to make it easier to understand. Let’s say your city’s mill rate is 5.5, and your home’s assessed value is $250,000. The formula for calculating property taxes looks like this:

5.5/1000 = $0.0055

$250,000 x $0.0055= $1,375

Therefore, your tax liability will be $1,375. Of course, many municipalities and counties simply state their average effective property tax rate online, so you can also estimate how much you’ll pay if you don’t know your mill rate. 

You should keep this number in mind whether you own a home or are considering taking out a loan, whether a VA loan or a non-QM mortgage. While property tax doesn’t account for too much of your budget, it is an additional payment you should consider when determining your monthly budget. 

Property Taxes: Frequently Asked Questions

What Happens If I Don’t Pay My Property Tax?

If you don’t pay your property taxes, your municipality can place a lien on your home. A lien will affect your credit score, preventing your home from being sold until the tax is paid. In addition, if you fail to pay your taxes for two years or more, your home can be foreclosed, with your property sold at a public auction. 

Ultimately, if you fail to pay your property taxes, the government has a legal right to your home, and if you continue to not pay your bill, the government can seize your property and sell your home. Failing to pay property taxes has the same consequences as failing to pay your monthly mortgage bill, so it’s important to budget for them even though they may seem like a small portion of your budget. 

If you find yourself unable to pay your property taxes, you should contact your municipality as soon as possible for information on what you can do to prevent a lien and foreclosure. Many cities offer installment agreements, but it may depend on your unique circumstances. 

Am I Able to Deduct My Property Taxes From My Federal Taxes?

You can deduct property taxes from federal taxes. However, those deductions are capped at $10,000. If your property taxes are paid through an escrow account as part of your monthly mortgage payment, you shouldn’t treat your entire payment as a deduction; instead, only the amount the lender pays the municipality is deductible. Luckily, this amount is easy to determine since it’s shown on Form 1098 that you’ll receive from your lender.

Itemizing your deductions is one of the best ways to reduce your overall tax liability, so you’ll use form Schedule A when filing your return. On this form, you’ll calculate your deduction instead of taking the standard deduction. 

In addition, you can only deduct property taxes in the year they were paid. If you buy or sell your home in the tax year, you’ll deduct only the taxes you paid when you owned the property. 

Final Thoughts

Property taxes may only seem like a small percentage of how much you pay as a homeowner, but they can greatly impact your financial health. If you have a mortgage lender, rolling your property tax payments into your mortgage payments is one of the most convenient ways to ensure you’re paying your property taxes on time every year. However, if you own your home, you’ll be responsible for paying property taxes on your own. Since failing to pay your property taxes can result in foreclosure, you should always budget for them before buying a home. 

Ready to start the homebuying journey? Griffin Funding is the nation’s premier provider of conventional and non-QM mortgages. We can help you determine which loans you’re eligible for and how payments work in your area. Learn more about our offerings by contacting us today. 

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.