My Perfect Mortgage
Property Taxes Explained Understanding the Basics
5 minute read
July 16, 2018

There are many adventures on the road to homeownership. One of them is learning the ins and outs of property taxes. Every year, millions of homeowners pay real estate property taxes to their local municipality.

The amount of the tax, the way it's calculated, and even how it's paid vary from place to place. Adding to the confusion for new homeowners, you may qualify for property tax exemptions and may be able to appeal your tax bill in some cases, as the laws affecting property taxes are always changing.

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It's important to get to know the ins and out of property taxes in your area before you buy a home, and to keep up with changing developments in the tax laws. It's knowledge that could save you money.

What New Homeowners Should Know About Property Tax

Property tax is an "ad-valorem" tax on real estate, meaning that a property owner pays a tax on a percentage of the value of their home. Taxes are levied each year by the local government, often your county government, with the funds going to support many local services, like schools, public works, first responders and more.

Property taxes are a major source of revenue for state and local governments. That means the cost to homeowners can be significant, with single-family homeowners in 2017 paying an average of almost $3,300, or about 1.15% of the value of the average home in property taxes. It also means that you can face penalty fees and interest, and potentially even foreclosure, for falling behind on property taxes on your new home.

How Property Tax Is Assessed

While the process varies by location, most property taxes are assessed by a county property assessor, who assigns a value to your home. Then the local tax authority sets the tax rate, called a mill levy or multiplier, at which that assessed value will be taxed. It's important to note that the assessed value of your home could be very different from the estimated market value. In some cases, it may be a very small percentage, perhaps only 8 to 10%. With the mill levy, one mill is equal to $1 for every $1,000 of assessed value.

Here's an example of how the math works out. Say your new home is valued at $100,000 on the housing market. Your local assessor assigns your home an assessed value of $50,000. The mill levy in your city is 0.02 or 20 mills. The assessed value is multiplied by the mill levy to yield a property tax of $1,000.

Both your assessed value and the local tax rate can vary from year to year, though some municipalities only adjust assessment values once every few years. This means your tax bill could change yearly as well, which is something to keep in mind, as some municipalities include a monthly portion of your property tax in your total mortgage payment. Other localities will send you a bill notice when the total yearly tax is due.

What You Should Know About Exemptions, Appeals, and Caps

You may be able to pay fewer taxes by taking advantage of exemptions. There are several standard exemptions all new homeowners should know about that are available in many areas throughout the country. The homeowner exemption, sometimes called the homestead exemption, gives a tax break to property owners who use their home as their primary residence, that is, not as a rental property or vacation home. Some tax jurisdictions also offer tax exemption discounts for senior citizens, veterans, spouses of deceased veterans, and disabled homeowners unable to work.

You may also be able to take advantage of a short-term home improvement exemption if your improvements have added value to your home. The tax assessor will usually allow the increased value to be factored into your tax bill over several years, easing the burden and saving you money on your home investment.

It's also possible to challenge or appeal an increase to your assessed value. Appeals are common when local authorities reassess values as a significantly higher level. Appeals aren't always successful, however, so it's a tool best used only when warranted.

It's also possible that your home's property tax assessment could be subject to a cap. This is particularly common in California, where assessment values are capped at an annual increase of only 2%, though market values can sometimes increase at a much higher rate.

What to Consider When Selling or Buying Your Next Home

Property taxes are an everyday factor in homeownership. So if you're thinking of selling your current home or buying a home, it's something you should take into consideration. For sellers, you may want to keep the local tax rate in mind when pricing your home. In some areas, high taxes may impact your asking price. Additionally, if you plan to purchase a home of similar value in a jurisdiction with a property tax cap, be aware that your new home's taxes could be much higher than those of your current home.

For home buyers, property taxes play an important role in setting a budget for how much house you can afford. Tax payments may be included in your monthly mortgage payment which means your payment could increase in coming years as taxes rise. Or, you may have to budget for a larger tax bill once a year. It's very important for buyers to learn about the particularities of the property tax code in their area before shopping for a home. Not only will you be prepared for your new homeowner responsibilities, but you may learn about local exemptions that will help you save thousands on taxes.

Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.