How Property Taxes Are Calculated

Property taxes are levied by cities, counties, and school districts on the properties within their boundaries and they're used by these organizations to provide services. All these levies are added together to calculate property taxes and work out the total tax rate, known as a mill rate, for a region. This rate is then multiplied by the assessed value of a property so people with more valuable properties pay more. Millions of homeowners pay property taxes every year.

Key Takeaways

  • Cities, counties, and school districts in a region have the power to levy taxes against the properties within their boundaries.
  • Property tax rates for each jurisdiction are calculated separately then all the levies are added together to determine the total tax rate, called a mill rate, for an entire region.
  • Property taxes are calculated by taking the mill rate and multiplying it by the assessed value of your property.?
  • The market value of your property is assessed by using one or a combination of three methods: performing a sales evaluation, the cost method, and the income method.
  • The market value is then multiplied by an assessment rate to arrive at the assessed value.

Assessing Property Tax

Different property types have various types of taxes assessed on the land and its structures. Vacant land will have a significantly lower assessed value than a comparable piece of property that's improved. It will have lower property taxes as a result. The land assessment might be higher if there is access to public services, such as sewer, water, and gas. It could lead to a higher assessment and more taxes for the owner if the assessor feels that the land has the potential to be developed.

The amount that a property is taxed comes from a percentage of the assessed value of the property.

Property taxes are a major source of income for city and county governments. Their boards, councils, and legislatures meet to decide the appropriate rates. They hold budget hearings to determine how much money?must be allocated to provide the various services required by the local community. These services include education, transportation, emergency, parks, recreation, and libraries and are funded by property taxes.?

The Tax Cuts and Jobs Act (TCJA) placed a cap of $10,000 per year (or $5,000 for those married and filing separately) on the federal tax deduction for state and local taxes (SALT) paid beginning in the 2018 tax year. This figure includes all real estate, income, and sales taxes on property. The TCJA provision is set to expire after 2025 but the federal American Families and Jobs Act that was introduced in 2023 aims to repeal or adjust this limit before that time.

Calculating Property Taxes

Property taxes are calculated based on the value of the property. This includes both the land and the buildings on it. Tax assessors will typically value the property every one to five years and charge the owner of record the appropriate rate according to the standards set by the taxing authority. Assessors calculate that value using the mill levy, also called the millage tax, and the assessed property value.

Example of a Property Tax Calculation

The tax rate for a property is determined by how many city and school districts a property lies within and adding together the rates applied by each. This aggregate rate is referred to as the mill levy. Each entity calculates its required mill levy and they are then tallied together to calculate the total mill levy.

Every city, county, and school district generally has the power to levy taxes against the properties within its boundaries.

The mill levy is the total tax rate levied on your property value. One mill represents one-tenth of one cent. One mill would be equal to $1 for each $1,000 of assessed property value.

Suppose the total assessed property value in a county is $100 million and the county decides it needs $1 million in tax revenues to run its necessary operations. The mill levy would be $1 million divided by $100 million, which equals 1%. The total mill levy for the region would be 4.5% (1% + 0.5% + 3%) or 45 mills if the city and the school district calculated a mill levy of 0.5% and 3%, respectively.

Two further steps are required to calculate a tax bill. First, a property’s value must be assessed via one of three methods. Then the value is multiplied by the assessment rate, which varies by jurisdiction and represents the percentage of a property on which taxes are due.

Suppose the assessor determines that your property value is $500,000 and the assessment rate is 8%. The assessed value would be $40,000. Taking the mill levy of 4.5% that we calculated previously, the tax due would be $1,800 ($40,000 × 4.5%).

3 Ways to Assess Property Value

Property taxes are calculated by taking the mill levy and multiplying it by the assessed value of the owner’s property. The assessed value estimates the reasonable market value for your home. It's based upon prevailing local real estate market conditions. The assessor will review all relevant information surrounding your property to estimate its overall value.

To give you?the most accurate assessment, the assessor must look at what comparable properties are selling for under the current market conditions, how much the replacement costs for the property would be, the maintenance costs for the property owner, any improvements that were completed, any income you're making from the property, and how much interest would be charged to purchase or construct a property comparable to yours.

The assessor can estimate the market value of the property by using three methods and they have the option of choosing a single one or any combination of the three.

1. Performing a Sales Evaluation

The assessor values the property using comparable sales in the area. Criteria include location, the condition of the property, any improvements, and overall market conditions. The assessor then makes adjustments in the figures to show specific changes to the property, such as new additions and renovations.

2. Cost Method

The assessor determines your property value based on how much it would cost to replace it. Assessors determine the amount of depreciation that has taken place and how much the property would be worth if it were empty if the property is older. For newer properties, the assessor deducts any realistic depreciation and looks at the costs of building materials and labor, including these figures in the final value of the property.

3. Income Method

This method is based on how much income you could make from the property if it were rented. Using the income method approach, the assessor considers the costs of maintaining the property, managing the property, insurance, and taxes, as well as the return that you could reasonably anticipate from the property.

Assessed Value

After determining the market value of the property, the assessed value will be arrived at by taking its actual value and multiplying it by an assessment rate. That rate is a uniform percentage and varies by tax jurisdiction. It could be any percentage below 100%. The assessed value is multiplied by the mill levy to determine your property taxes due.

The assessor works in two stages when they have the value:?First, they send the assessed value of the property to the owner then they follow it up with a tax bill.

Other Considerations on How Your Property Value Is Assessed

Most property tax assessments are performed either annually or every five years depending on the community where the property is located. A property tax bill is mailed separately after the owner has received their assessment with its property valuation.

The information that the assessor has is considered to be part of the public record. Owners can see how much they must pay by going to the assessor’s website and entering their address. They may sometimes be charged a small fee for accessing this material.

Another option is to go to the assessor’s office in the county courthouse. You can look up the information there and print out a copy for a nominal fee.

Why Is My Property Tax Higher Than My Neighbor’s?

This will typically be due to the assessed value of your home being higher. Your home may have a higher value if you have a larger plot of land, if your residence is larger, or if your home has desirable features. In some rare cases, however, you may live in a different jurisdiction from your neighbor.

What State Has the Highest Property Taxes?

The mean effective property tax rate (total real estate taxes paid divided by total home value) across the United States was 1.08% as assessed from data from the Tax Foundation, a tax policy research organization, in 2022. New Jersey had the highest rate in the country at that time at 2.21%. Hawaii had the lowest rate, at just 0.31%, followed closely by Alabama at 0.39% and Louisiana at 0.54%.

What States Have No Property Taxes?

All 50 states and the District of Columbia have property taxes. But some people may qualify for a property tax exemption. Certain states have homestead exemptions or exemptions for older homeowners, people with disabilities, military veterans, and homeowners who install renewable energy systems like solar panels.

The Bottom Line

Paying the right amount of property taxes requires understanding how the tax is calculated, where you can get this information, and when tax bills are sent out and due. Some cities allow their residents to view and/or pay their property tax bills online. Property owners should do their part to remain educated by knowing how their taxes are calculated, when the billing cycle is, and where they can locate this information. 

Article Sources
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  1. Tax Foundation. "County Data Shows Repealing SALT Cap Would Benefit High-Income Earners."

  2. Madison County, Montana. "Millage Rate Explained."

  3. New York State Department of Taxation and Finance. "I. Valuation Standards."

  4. Tax Foundation. "Facts & Figures. How Does Your State Compare? 2022."

  5. Tax Foundation. "Where Do People Pay the Most in Property Taxes?"

  6. National Association of Counties. "Property Taxes: A Look at Exemptions, Tax Limits and Assessment Cycles." Page 5.

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