For American homeowners, real estate taxes are an immutable fact of life. Virtually every homeowner pays real estate tax – property tax, in common parlance – to at least one jurisdiction:
- Incorporated villages, towns, boroughs, or cities
- Counties or parishes
- School or utility districts
- Special tax assessment districts, whose revenues go toward specific initiatives or into specific funds
Though they may pass laws that directly or indirectly impact property tax collections, state governments generally don’t assess property taxes for their own purposes.
Property taxes aren’t assessed uniformly. The northeastern United States is infamous for its hefty property tax burdens, while southern and western states (with notable exceptions, like Texas) are much more homeowner-friendly. According to Realtor.com (citing data in the American Community Survey), New Jersey had the highest effective property tax rate (2.14%) and overall property tax burden ($8,374) in 2016. Hawaii had the lowest effective rate (0.29%), while Alabama had the lowest overall property tax burden ($667) due to the comparatively low value of real property there.
The good news: No matter where they live or how much they pay, homeowners are always entitled to appeal their property tax assessments. The process isn’t always easy or without financial risk, but it’s worth pursuing – or at least looking into – if you genuinely believe your property tax burden is too high.
Let’s take a closer look at how property tax is calculated and by whom, how to investigate and appeal your property tax assessment, and the upsides and downsides of appeals.
Pro Tip: Real estate is not the only asset class subject to property tax. Other durable assets, notably vehicles and business property, are subject to tax in most jurisdictions. If you own a car, you probably pay vehicle tax (wheelage tax) via annual or biannual license plate tab renewal fees.
How Property Tax Is Calculated
According to the Institute on Taxation and Economic Policy, taxing authorities calculate property taxes using the following formula:
- assessed value = market value * assessment ratio
- taxable value = assessed value – exemptions
- property tax before credits = taxable value * total millage rate
- total property tax owed = property tax before credits – homestead credits and circuit breakers
Note that exemptions, homestead credits, and circuit breakers can all have zero values. In some cases, then, property tax can be calculated with an even simpler formula:
- total property tax owed = assessed value * total millage rate
Property Tax Definitions
Let’s break down this formula even further:
- Market Value: This is your taxing authority’s best guess at your property’s fair market value: what it would sell for if someone made an offer on it tomorrow. It’s calculated using public and privileged information about your property. Factors that affect your home’s market value include its location, valuations on comparable properties sold recently nearby (“comps”), recent additions or upgrades, and general condition. As the most subjective factor in property tax calculations, market value is central to most property tax assessment appeals.
- Assessment Ratio: The assessment ratio can range from 0 to 1. Think of it as a discount to fair market value. In many jurisdictions, the assessment ratio is high: 0.9 or greater. In others, it’s quite low: 0.2 to 0.4. Some states have laws that preempt dramatic changes to local assessment ratios or establish uniform ratios across jurisdictions. Others impose more complex rules that effectively limit assessment ratio increases. For instance, New York state law limits “the growth in annual levy…to the lesser of 2 percent or the Consumer Price Index (CPI), subject to certain limited exceptions and adjustments” outside the five boroughs of New York City, according to New York State Department of Taxation and Finance Publication 1000. Assessment ratios often vary by property type as well – for instance, commercial or agricultural property may have a lower assessment ratio than residential property.
- Property Tax Exemptions: Exemptions reduce assessed taxable value for select homeowner groups. Common exemptions cover homesteads (primary residences), senior citizens (often with means testing to exclude high-income seniors), disabled homeowners, active-duty servicemembers and veterans, households falling below set low-income thresholds, energy efficient home improvements, and certain other renovations and upgrades.
- Millage: “Millage rate” is a fancy way of saying “tax rate.” In overlapping tax jurisdictions (such as county and school tax districts), or in single jurisdictions where property taxes support multiple revenue streams, a given property’s total millage rate is the sum of all subordinate tax rates applicable to that property.
- Property Tax Credits: Property tax credits directly reduce property tax liability. In some jurisdictions, homestead benefits are awarded via credits, not exemptions. Other common property tax credits include credits for taxes assessed by overlapping districts (such as school levy credits on county taxes), “first dollar” credits for improvements to vacant land, and lottery or gaming credits financed by receipts from state lotteries or local gaming facilities. Don’t confuse credits applied directly to property taxes with property tax credits applied to state income taxes.
- Circuit Breakers: Property tax circuit breakers are special credits for low-income homeowners in high-tax jurisdictions. Per the Institute on Taxation and Economic Policy: “When a property tax bill exceeds a certain percentage of a taxpayer’s income, the circuit breaker reduces property taxes in excess of this ‘overload’ level.”