What Property Taxes Pay For

Your local government needs every dime it can collect to pay for the services you expect as a resident: schools, libraries, hospitals, and so on. Much of that revenue comes from property taxes. In normal times, real estate values climb steadily, allowing local governments to take in a little more every year to keep up with inflation and perhaps even add a few services. Property tax bills usually come due once or twice a year.

The situation gets stickier when real estate values decline. If that occurs, local governments generate less revenue from property taxes, meaning the tax rate needs to go up, the money needs to come from somewhere else, or spending on services needs to go down.

Not all counties can just raise taxes at any time. Sixteen states limit the property taxes counties can collect, and 38 of them limit property tax rate increases, property tax assessments, or both, according to the National Association of Counties.

Assess Your Real Estate Assessment

No matter if property values are rising, falling, or stagnant, you need to understand how you’re being taxed. Everything starts with your real estate assessment letter, which reveals what your property is judged to be worth by the local government. The letter will differ, depending where you live, but most will have:

  • A legal description of your house
  • Separate values for the land and the structure

Add those two numbers together to get your home’s assessed value.

Some local governments will appraise your home every year, others every two or more years. Tax assessors generally use one of two methods to come up with an assessment value for your home.

1.  The most common method: Looking at recent sales of comparable homes. Keep in mind that “recent” is a relative term. To come up with a real estate assessment, assessors may be looking at sales that occurred as long as 18 months ago

2.  Alternative method, especially in the absence of recent sales data: Calculating the cost to rebuild your home, and adding that to the estimated worth of your land to come up with your home’s assessed value.

Assessments Used to Calculate Property Tax

How much you pay in property taxes is based on your real estate assessment. You multiply your assessed value by the local tax rate and that’s how much property tax you pay.

It can become more complicated if there are multiple taxing authorities where you live — a city and a county, for example — or if there are special one-time assessments. Qualifying for property tax exemptions, perhaps due to age or disability, can also alter the formula. Some local governments offer online calculators on their websites, or you can call the tax assessor’s office for help.

How Property Taxes Get Calculated

If you want to run the numbers for yourself, don’t be intimidated by how your tax rate is expressed. Sometimes it’ll take the form of a percentage, say 1.5%, or perhaps a decimal, 0.015. Both equal the same thing.

In the 0.015 example, the owner of a home that’s assessed at $100,000 would owe $1,500 a year in property taxes. Other times it’ll be expressed as an amount per $100 or $1,000 of home value. In the case of a 1.5% tax rate that would mean $1.50 per $100 or $15 per $1,000. Regardless, the math doesn’t change: Multiply $100,000 by 0.015.

Make Sure Your Assessment is Accurate

Read your real estate assessment letter carefully, look for errors, and challenge your assessment if it seems too high.

If you find a way to reduce your real estate assessment, whether by contesting it or qualifying for an exemption, the savings can add up. The median annual property tax paid in the U.S. is about $2,000, or about 1% of the $200,000 median home value. By lowering the value of the home by 15%, you’d also lower the tax assessment by 15% since property tax is calculated based on value. So you’d save $300 on taxes.

This article provides general information about tax laws and consequences, and shouldn’t be relied on as tax or legal advice applicable to particular transactions or circumstances. Consult a tax pro for such advice.