Property Tax: Definition, What It's Used for, How It's Calculated

What Is Property Tax?

Property tax is a tax paid on property owned by an individual or other legal entity, such as a corporation. Most commonly, property tax is a real estate ad-valorem tax, which can be considered a regressive tax. It is calculated by a local government where the property is located and paid by the owner of the property. The tax is usually based on the value of the owned property, including land. However, many jurisdictions also tax tangible personal property, such as cars and boats.

The local governing body will use the assessed taxes to fund water and sewer improvements, and provide law enforcement, fire protection, education, road and highway construction, libraries, and other services that benefit the community. Deeds of reconveyance do not interact with property taxes.

Key Takeaways

  • Property owners pay property tax calculated by the local government where the property is located.
  • Property tax is based on the value of the property, which can be real estate or—in many jurisdictions—also tangible personal property.
  • Improvements in water and sewer use the assessed taxes.
Property Tax: A tax on real estate paid by the property owner.

Investopedia / Dennis Madamba

Understanding Property Tax

Property tax rates and the types of properties taxed vary by jurisdiction. When purchasing a?property, it is essential to scrutinize the applicable tax laws.

In most Organization for Economic Co-operation and Development (OECD) countries, immovable property tax represents a low proportion of federal revenue when compared to income taxes and value-added taxes. However, the rate in the United States is substantially higher than in many European countries. Many empiricists and pundits have called for an increase in property tax rates in developed economies. They argue that the predictability and market-correcting character of the tax encourages both stability and proper development of real estate.

Calculating Property Tax

The amount owners owe in property tax is determined by multiplying the property tax rate by the current market value of the lands in question. Most taxing authorities will recalculate the tax rate annually. Almost all property taxes are levied on real property, which is legally defined and classified by the state apparatus. Real property includes land, structures, or other fixed buildings.

Ultimately, property owners are subject to the rates determined by the municipal government. A municipality will hire a tax assessor who assesses the local property. In some areas, the tax assessor may be an elected official. The assessor will assign property taxes to owners based on current fair market values. This value becomes the assessed value for the home.

The payment schedule of property taxes varies by locality. In almost all local property tax codes, there are mechanisms by which the owner can discuss their tax rate with the assessor or formally contest the rate. When property taxes are left unpaid, the taxing authority may assign a lien against the property. Buyers should always complete a full review of outstanding liens before purchasing any property.

Property Tax vs. Real Estate Tax

People often use the terms property tax and real estate tax interchangeably. And it's partially true: Real estate tax is a property tax. However, that's not true the other way around. Not all property taxes are real estate taxes.

As noted above, in addition to real estate, many jurisdictions also levy property taxes against tangible personal property. According to a report by the Tax Foundation, 43 states tax tangible personal property. Both types of property are tax deductible if you file Schedule A with your income taxes. However, since the Tax Cuts and Jobs Act, the amount of state and local taxes (SALT) taxpayers could deduct from their federal income taxes fell from no limit to $10,000 per year for either married couples or single taxpayers. Those in the married filing separately category have a $5,000 cap.

So here's the difference: Real estate taxes are taxes on real property only; property taxes can include both real property and tangible personal property.

Why Are Property Taxes So High in the U.S.?

According to the Lincoln Institute of Land Policy, four key factors explain why property taxes are high in the U.S. and why they vary so greatly by state: property tax reliance, home values, local spending, and classification.

What Cities Have the Highest Property Taxes?

According to the Lincoln Institute of Land Policy, the average property tax rate was 1.32% in 2022. However, the following cities had the highest tax rates, way above the average:

  • Detroit: 3.21%
  • Newark, New Jersey: 3.20%
  • Aurora, Illinois: 3.04%
  • Bridgeport, Connecticut: 3.04%
  • Portland, Oregon: 2.59%

What States Have the Highest and the Lowest Property Taxes?

According to the Tax Foundation, the following states have the highest property tax rate as of 2019 (the most recent data available):

  • New Jersey: 2.13%
  • Illinois: 1.97%
  • New Hampshire: 1.89%

The following are the states with the lowest property tax rate:

  • Hawaii: 0.31%
  • Alabama: 0.37%
  • Louisiana and Wyoming: 0.51%

The Bottom Line

Property tax is defined by the Tax Foundation as the tax that is imposed on immovable property like land and buildings, as well as on movable property, like vehicles and equipment. Property tax is the single largest source of state and local revenue in the U.S. The capital is used to fund schools, roads, police, and other services. Property tax rates vary greatly among states and localities.

Article Sources
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  1. Cornell Law School, Legal Information Institute. "Property Tax."

  2. Tax Foundation. "Glossary: Regressive Tax."

  3. Tax Foundation. "Glossary: Property Tax."

  4. Organisation for Economic Co-operation and Development. "Tax on Property," Select "Highlighted Countries: United States" and Select "Background: Euro Area."

  5. Cornell Law School, Legal Information Institute. "26 CFR § 1.856-10 - Definition of Real Property."

  6. Tax Foundation. "States Should Continue to Reform Taxes on Tangible Personal Property."

  7. Internal Revenue Service. "With New SALT Limit, IRS Explains Tax Treatment of State and Local Tax Refunds."

  8. Lincoln Institute of Land Policy. "50-State Property Tax Comparison Study."

  9. Lincoln Institute of Land Policy. "50-State Property Tax Comparison Study," Download Full Report, Pages 14, 19.

  10. Tax Foundation. "How High Are Property Taxes in Your State?"

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