How To Calculate Property Tax

Key Takeaways

  • Calculating property taxes is an intimidating endeavor, but nonetheless an important one.
  • Calculate your property tax prior to buying a home by multiplying your home’s assessed value by the mill levy.
  • As always, when dealing with taxes, work with a tax professional to make sure you proceed accordingly.

Calculating property taxes is an intimidating endeavor, but nonetheless an important one. At the very least, it’s those who are able to accurately identify each and every one of their expenses who will find establishing a budget isn’t all that hard. And what is a budget if not for the foundation on which just about every deal is founded? What’s more, you can’t possibly know how much home you can afford if you don’t take every expense into consideration. Therefore, the ability to calculate property taxes isn’t only important, but also essential when coming up with a budget — or buying a home, for that matter.

If you want your budget to reflect an accurate representation of what you can afford, you need to know how to calculate property taxes, and this guide should help you get the ball rolling.

What Are Property Taxes?

Property tax is exactly what you’d expect it to be: a tax levied on physical real estate. More often than not, it’s based on the value of the property, not excluding the land it sits on top of. It is worth noting, however, that property tax isn’t universal — far from it, in fact. Instead of being federally regulated, as many falsely assume, property tax is actually assessed by local or municipal governments, and can vary dramatically from region to region.

Not unlike most other taxes, property tax is assessed on real estate for one simple reason: to generate money for public services. It is not uncommon for municipalities to use the proceeds from property tax to address public services, not the least of which includes repairing roads, building schools and snow removal, fire protection, garbage pick-up or other similar services. Property taxes make it possible for many public services to remain intact.

Perhaps even more importantly, property tax is first and foremost compulsory, meaning it’s required by law. Homeowners are, therefore, required to pay property tax each year. The rate they are expected to pay, however, is dependent on their particular local government and the value of their asset.


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How are property taxes calculated?

How Are Property Taxes Calculated?

Property taxes are assessed differently from state to state, and even from municipality to municipality. It is not uncommon for even neighboring cities to assess their property tax rates differently. There is, however, a general guideline for calculating property taxes that could give you a better idea of what to expect; it’s not perfect, but it’s generally accepted by those looking for a “ballpark” estimate.

Typically, “the value of property taxes is determined by multiplying the property tax rate by the current market value of the property in question, which is periodically recalculated by municipalities,” according to Investopedia.

When all is said and done, the property tax rate levied on homeowners is determined by their own local government. More specifically, calculations will include specific values identified by a tax assessor (hired by the municipality), who is specifically tasked with assessing nearby home in order to determine their property tax obligations based on the current fair market value of each subject property. That’s an important distinction to make: the property tax is based off the current fair market value of a subject property. As a result, property taxes are always in flux.

Calculating Property Taxes By State

According to data presented by the U.S. Census Bureau, “the average American household spends $2,197 on property taxes for their homes each year.” It is worth noting, however, that the average amount of property taxes paid each year doesn’t tell the whole story. In reality, property tax assessments will vary from city to city and — yes — state to state.

For example, WalletHub acknowledges that New Jersey boasts the most expensive property tax rate in the country. With a median home value of $316,400, the average homeowner in New Jersey will pay somewhere in the neighborhood of $7,601 a year in property taxes. That’s an effective real estate tax rate of 2.40%. Compare that to Hawaii’s 0.27% effective real estate tax rate, and you’ll notice a significant difference. The median home value in Hawaii is approximately $538,400, which results in a $1,459 property tax bill for the average homeowner in The Aloha State.

There’s no doubt about it: tax rates vary from state to state. However, not unlike local municipalities, state tax rates are always changing. Be sure to take said changes into account the next time you try to calculate your own property taxes.

How To Calculate Annual Property Tax

In order to calculate your annual property tax rate, there’s one thing you must do before anything else: determine the current fair market value of your home. That said, homeowners are better off listening to what their tax assessors have to say. While you may have an idea of how much your home is worth, it’s the tax assessor’s assessment value that you need to calculate the amount you will pay in property taxes.

To be clear, your homes already been assessed by a tax assessor, but I digress. Tax assessments take place “every time a property is sold, bought, built, or renovated by examining the permits and paperwork filed with the local municipality,” according to Realtor.com. However, to accurately calculate your property tax obligation, the assessment needs to be of the home’s current value. With any luck, a proper assessment may already be made available on your municipality’s website, or by calling your tax assessor personally.

Once you are confident you have your home’s assessed value, you will need to determine another number: the mill levy. Otherwise known as the tax rate for your particular area, a mill levy will also vary from city to city, so be sure to get the correct information. As it turns out, mill levies will often reflect an areas amenities. A luxurious neighborhood with nice roads and schools, for example, will most likely have a larger mill levy. What’s more, the mill levy can be found on your local tax assessor’s website; they are often represented as a percentage.

Once you have both of the numbers you need, simply multiply your home’s assessed value by the mill levy. The resulting number will be the amount of property taxes you are expected to pay each year.

How to calculate property taxes

How Do I Pay Property Taxes?

How you pay your property taxes will usually depend on how you purchased the home. Generally speaking, however, most homeowners will pay their property taxes through an escrow account set up by their loan provider. In other words, if your lender set up an escrow account for your mortgage, you’ll be expected to pay your property taxes through the same escrow.

You won’t be expected to pay your property taxes all at once. Instead, the lender will actually estimate your property taxes for you, and expect you to pay off a portion of them every month over the course of a year. Remember, this is just an estimate, as rates are always changing, so the amount you pay over the course of 12 months may cover the property tax, or it may not. You may be in line to pay more at the end of the year, or receive a refund.

Approximate Property Tax Calculator

Again, there is no universal equation for calculating property taxes that will give you the exact amount of you can expect to pay each year. The variance between state to state and even city to city is too great. Each region will have its own tax rate to deal with. However, SmartAsset happens to have a property tax calculator that can make things a little easier, or at least give you a good approximation.

Calculating property taxes may not be for everyone, but I can assure you the ability to do so will come in handy. At the very least, properly calculating your tax obligations each year will help you pinpoint expenses and make budgeting a lot easier. Hopefully this guide will give you the confidence to make some calculations of your own. Let us know what you think in the comments below.

*The information contained herein was pulled from third party sites. Although this information was found from sources believed to be reliable, FortuneBuilders Inc. makes no representations, warranties, or guarantees, either express or implied, as to whether the information presented is accurate, reliable, or current. Any reliance on this information is at your own risk. All information presented should be independently verified. FortuneBuilders Inc. assumes no liability for any damages whatsoever, including any direct, indirect, punitive, exemplary, incidental, special, or consequential damages arising out of or in any way connected with your use of the information presented.
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Real Estate Investing Strategies
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