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Property taxes are one of the biggest costs of owning your own home. Property taxes are taxes you pay on the real estate you own: your primary residence, vacation home, rental property or land. Property taxes are generally local, so they vary by rates, policies and payment terms from city to city and county to county. Here's how property taxes work, how to estimate them and how to pay.
What Are Property Taxes?
Property taxes are taxes levied by local governments (cities and counties) to pay for services like schools, garbage collection, police and fire, water and sewage, roads, libraries, parks and other services. Although some jurisdictions also tax personal property like boats and cars, property tax is commonly understood to be a tax on real estate, including land and improvements (such as your house).
Anyone who owns property is subject to property taxes. Renters don't pay property taxes, except indirectly through the rent they pay to their tax-paying landlords.
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How Are Property Taxes Calculated?
The formula your local tax assessor uses to calculate your property taxes may be complex. But the basic formula for estimating your property taxes is simple:
Assessed property value x tax rate = Property tax
What's Your Assessed Value?
The assessed value of your property could be its fair market value based on recent property sales or an assessed value based on an appraisal. In some places, the assessed value is a percentage of the full fair market value. The assessed value of your property appears on your property tax bill, and may be recalculated periodically.
What's Your Tax Rate?
Property tax rates can vary widely from one city or county to the next. Visit your city, county or state website for more information on property tax rates, or check with your local tax assessor.
Here's an example of how to estimate your tax bill. In the city of Los Angeles, the average property tax rate is around 1.22%. If you owned a home in Los Angeles with an assessed value of $900,000, your property tax would be:
$900,000 x 1.22% = $10,980
Your property tax bill may include additional taxes for special assessments that aren't covered under your regular taxes. These projects might include school parcel taxes or sewer service charges, community projects like road repair or other infrastructure, or supplementary operational costs for police or fire departments.
How to Pay Property Taxes
You can pay your property taxes directly to your city or county, or make monthly escrow payments to your mortgage provider that they'll use to make tax payments for you.
Some mortgage companies require you to make monthly payments into an escrow account to help ensure that your property taxes are paid. Unpaid property taxes can result in liens against your property or even foreclosure to the taxing authority, which your mortgage company would obviously prefer to avoid. If property tax payments aren't included in your monthly mortgage payment, you may be able to opt in by asking your mortgage company to set up escrow payments for you.
If you'd rather pay your property tax bill directly, look for tax bills in the mail. You may receive bills from the county and city separately or as one comprehensive bill. Different jurisdictions offer different payment arrangements. While paying your annual bill in full is always an option, some local tax assessors also allow you to pay quarterly or semi-annually. In any case, always pay your bill by the due date to avoid late charges, tax liens, collections and possible foreclosure.
Ways to Save on Your Property Taxes
Lowering your property taxes isn't easy. Unlike income taxes, where various deductions and credits may apply, property taxes don't have many moving parts. Property tax rates are typically fixed within a jurisdiction, meaning everyone pays the same tax rate. If you want to lower your property taxes, you'll usually need to find a way to reduce your assessed property value. Here are some options you may have open to you:
- Find a property tax exemption. An exemption lowers your property's assessed value based on a special circumstance. Exemptions vary from one jurisdiction to another, but common examples include exemptions for senior citizens, disabled people, veterans or homesteaders. Check with your local taxing authority to learn about exemptions in your area.
- Dispute your property's assessed value. If you think your property's assessed value is too high, you may be able to dispute it. Contact your local assessor's office to learn more about the dispute process in your city or county, then check comparable property values or document reasons why your property value might be less than assessed.
- Get an escrow waiver. If you'd rather pay your property taxes directly, you can lower your monthly mortgage payment. This move doesn't lower your property tax bill; it simply reduces your monthly mortgage payment amount if your lender will allow it.
- Deduct property taxes on your federal tax return. This may be an option for you if you itemize deductions. Individual taxpayers can deduct up to $10,000 ($5,000 if married filing separately) for state and local income taxes, sales tax and property taxes combined.
The Bottom LIme
Property taxes can add thousands of dollars to your housing costs each year. If you're planning to buy a home or other real estate, estimate your property taxes in advance to get a clearer picture of what your regular costs will be. Although paying property taxes isn't fun, your taxes go toward providing valuable community services like schools, police, fire, roads and parks—amenities that make your community livable and your property more valuable.