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What are property taxes and how do they work?

Key takeaways

  • If you own real estate, you probably owe taxes based on the value of your property and where it's located.
  • State and local governments charge property taxes to pay for road repairs, schools, the police, and other services.
  • The government calculates your property tax bill, but you can appeal if you can prove their estimate of your property's value is too high.
  • There are exemptions to reduce or remove property taxes in certain situations, like for homeowners over the age of 65 or who have a disability.

There are a host of expenses that come with owning real estate. Among them are property taxes, which are fees collected by state and local governments where your property is located. The amount of taxes an owner pays varies by location and property value. Taxes can be costly, especially in certain counties. By understanding what property taxes are and how they’re calculated, you can budget accordingly and possibly find ways to save on your tax bill.

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What are property taxes?

Property taxes are fees charged on a piece of real estate. If you own property—as a residence, business, or investment—you’re expected to pay property taxes on it every year. Depending on where you live, you could owe property taxes to your state, county, and/or local government.

How do property taxes work?

Property taxes are based on the value of your real estate and the tax rates set by your local and state governments. Your local government will regularly assess your property’s value, typically once per year, though some areas do appraisals every 3 years or even less frequently. The appraisal could consider the recent sales prices of similar properties, the cost to rebuild your home, or the income that could be generated from renting out the property.

With this amount, the government then calculates your taxes and sends you a bill for what you owe. Keep in mind that the amount you owe could change from year to year as your property’s assessed value and/or tax rates in your area go up or down.

How are property taxes calculated?

Property taxes are calculated in different ways depending on where you live. But here’s a general overview of how the government tallies up your bill.

1. They assess your property’s value

To determine your property’s value, an assessor might come out and evaluate both your land’s and building’s market value, factoring in any upgrades. The assessor could also consider the sales prices of similar properties in your area.

It’s important to note this assessed value isn’t necessarily what you’d get from selling the property. That all depends on what a buyer is willing to pay. The assessed value is just the government’s estimate of how much the property is worth for tax purposes.

2. They multiply the value by the area’s property tax rate

Next, the government will multiply the assessed value of your home by your area’s property tax rate. Tax rates vary depending on where you live, so the numbers could look very different across the country. A locality might tax only half of your assessed value for property taxes or set different rates based on your property type (a single-family home vs. a condo vs. a multi-family building, for example).

The government will run the numbers for you, but if you want to estimate your tax bill yourself, ask your local tax office for all property tax rates that apply to you. For instance, if the assessed value of your home is $500,000 and your property tax rates total 1.2%, you would owe $6,000 that year in property taxes—because $500,000 x .012 = $6,000.

3. They deduct any exemptions

Many localities offer exemptions to reduce or remove property taxes for certain owners. These could include seniors, veterans and active-duty service members, people with disabilities, and religious organizations. You also could owe less taxes on a property if it’s your primary residence rather than a vacation home or investment.

4. You may choose to appeal over disagreements about the tax bill

If you think the government miscalculated the value of your home, you can file an appeal. You would then get a second opinion, a comparable market analysis done by a third-party assessor or real estate agent. You could also appeal a tax bill if you believe you qualify for an exemption but didn’t receive one. Either way, if you’d like to appeal your property taxes, check your area’s rules for filing. Some require appeals in writing while others have to be done in person.

Property taxes vs. real estate taxes

Property taxes and real estate taxes usually refer to the same thing. The IRS uses the term "real estate taxes," but most other governments and organizations use the term "property taxes." They both refer to a tax collected based on the value of a piece of real estate.

But there are also personal property taxes, which are different than real estate taxes because they can be imposed on movable assets such as cars, boats, planes, and machinery.

Are property taxes deductible?

Yes, property taxes could be deductible if the property you own is your primary residence or a vacation home. In those cases, if you itemize, you're allowed to deduct a combination of your property taxes and either your state and local income taxes or your state and local sales taxes, up to $10,000 (or $5,000 for those married and filing separately). If you own an investment property, you could deduct the property taxes against any earned rental income.

What are property taxes used for?

State and local governments use property taxes to pay for schools, road repairs, police and fire departments, garbage and/or recycling collection, and other services for area residents. You might receive a property tax bill for a specific project, called a special assessment tax. This pays for a project that benefits your area, like building/maintaining roads or sewer lines in your neighborhood. Your tax bill could list the special assessment tax separate from your regular property taxes so you can see where the money is going.

When do you pay property taxes?

After the government calculates your property tax bill, it will tell you how and when to pay. Some areas have you pay for everything in one shot annually. Others allow you to split the bill into quarterly or semi-annual payments.

If you have a mortgage, you might be able to pay property taxes through your lender. In those cases, the lender will increase your monthly payment to cover both the mortgage and the taxes.

Like income taxes, property taxes are paid the year after they are assessed. In 2024, you’ll pay property taxes for 2023, for example.

What happens if you don’t pay your property taxes?

If you don’t pay your property taxes, the government will tack interest and/or penalties onto your tax bill over time. And if you don’t catch up, they can impose a lien against your property, meaning that if you sell it, the government will collect payment for your delinquent property taxes before any money goes to you.

In more extreme cases, unpaid property tax bills could result in a tax lien sale, in which the local government sells your lien to someone. After that, the original homeowner could be forced out of the property through foreclosure.

What states have no property taxes?

All 50 states and Washington, DC, charge property taxes. But there are more generous exemptions in some states, such as Alabama, where blind homeowners, permanently and totally disabled homeowners, and homeowners over 65 are off the hook for state-imposed property taxes. (County taxes could still apply.)

Still, remember that property taxes are just one piece of the cost-of-living pie, and some states with low property tax rates could be making up for it by charging higher income or sales tax.

Here’s a look at the 5 highest and 5 lowest state property tax rates.1

States with the lowest property tax rates States with the highest property tax rates
Hawaii (0.28%) New Jersey (2.49%)
Alabama (0.41%) Illinois (2.27%)
Colorado (0.51%) New Hampshire (2.18%)
Louisiana (0.55%) Connecticut (2.14%)
South Carolina (0.57%) Vermont (1.90%)

Want to know more about where your money could go further? Check out our guide to the best states for taxes.

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1. Peter Warden, "From Low to High: Ranking Property Taxes by State," The Mortgage Reports, November 21, 2023.

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