Every state imposes some form of property tax. These taxes are commonly associated with real estate, but some states tax vehicles and other assets as well. Rates can range from very low in one state to astronomically high in another, but other types of taxes can balance property tax rates so the overall impact on residents is about the same.
Property taxes generate the revenue that states need to keep themselves up and running and to provide necessary services to their residents. School districts tend to rely heavily on these taxes, but the revenue also funds city and state workers' salaries—including first responders—as well as water, sewer, and other services.
Property taxes aren't set only at the state level. Some cities, counties, and local school boards also impose these taxes, so they might be higher in one area of a state than in others.
How Property Taxes Are Calculated
A lot of complicated math is used to calculate property taxes, and states compute rates according to their own unique formulas. All share two important components, however: a property's assessed value and the tax rate. The percentage tax rate is applied to the value to arrive at your tax bill.
Percentages are a good way to compare state property tax burdens because they provide a standardized number.
Someone in State A might pay $10,000 a year on a home worth $1 million, while someone in State B pays $10,000 a year on a condo worth $150,000. The person in State B has a far more onerous tax burden. The person in State A is paying only 1% of their home's value while the State B resident is paying almost 7%, even though they're paying the same tax dollar amount.
Who Sets Home Values?
You can't simply tell the state, county, or municipality how much you think your home is worth and let them take it from there. Your home's value for tax purposes is based on its appraised value, and the appraiser isn't an independent third party. Tax assessors typically work for the government.
Most states have an appeal process in place so you have some recourse if you receive what you consider to be an astronomical and unreasonable assessment.
You can expect your tax bill to go up if you add a second floor to your home or put an in-ground swimming pool in your backyard because improvements such as these will most likely increase your home's value. You could find yourself paying more in property taxes even if your state's tax rate remains unchanged because that percentage rate is applied to a larger value.
How the Appraiser Arrives at Value
The values of recently sold homes in your area can be taken into account when calculating value. The appraiser will compare your home to others similar to yours and value it based on those sales prices, using a method known as the market approach.
The cost approach is based on how much it would cost to replace your home, although this method is used less frequently with residential properties.
The 10 Best States for Property Taxes
Tax-Rates.org reported on the top 10 best states for these taxes in 2020, showing them in order from lowest to highest rates.
These are median percentages using aggregate data—half of all rates are higher, and half are lower in each state.
The 10 Worst States for Property Taxes
World Population Review found that homeowners in the following states paid the most in property taxes in 2020. They're ranked from the most to least expensive in this category.
The difference between Louisiana, the state with the lowest rate, and New Jersey, with the highest rate, is a significant 1.71 percentage points. This figure might not sound like much at first glance, but it can come out to a pretty significant tax bill when it's correlated to a home's value, particularly on a luxury home.
The median tax on a $1.5 million Louisiana home works out to $2,700 at 0.18%. It works out to $28,350 in New Jersey at a median rate of 1.89% on the same home value. That's a difference of $25,650.
The Correlation With Other Tax Rates
Some states that impose formidable property tax rates give residents a few breaks in other major tax categories. For example, Texas taxes property at a significant median rate of 1.81%, but it has no state income tax. The state relies heavily on property taxes to make ends meet.
Some states such as New Jersey and Illinois impose high taxes across the board, however. Hawaii made the list of the 10 best for property taxes, notching in at No. 2 at just 0.26%, but its other taxes are high across the board.
Property Tax Relief
Several states offer various options to reduce the burden of these taxes.
- Some provide property tax exemptions to senior citizens, veterans, and the disabled.
- Several states offer homestead exemptions for at least a portion of a home's value if the owner resides there and it's not a rental or investment property.
- Homeowners might also qualify for a state tax credit in some areas based on the amount of their property taxes. You can also claim a tax deduction for property taxes on your federal return if you itemize your deductions, subject to some limitations.
You can often ask for relief if you're going through a tough financial time. Some taxing authorities will defer your payments for a while.
The worst thing you can do is ignore your tax bill if it's not included in your monthly mortgage payment, which is often the case. Simply not paying can invite disaster in the way of tax liens and foreclosure.
Frequently Asked Questions (FAQs)
How can I lower my property taxes?
Tax rates are based on the assessed value of your home, and that changes with market forces that are largely out of your control. However, you can attempt to keep your taxes lower by limiting improvements to your property. This will limit your home's sale price when it comes time to sell, though. You can also research exemptions or deductions that may be available in your area.
When do you start paying property taxes on a new home?
If you take out a mortgage to purchase your home, you will begin paying property taxes as a part of your closing costs. Your monthly mortgage payment will also include 1/12 of your estimated annual taxes, which will fund an escrow account that your lender will use to pay your property taxes each year. If you don't need a loan, then you will likely pay your property taxes directly to your local tax agency once per year.
How do I find out how much my property taxes are?
You will receive an annual property tax bill from your local tax agency—or an annual statement from your lender if you pay through escrow—with your total tax amount. If you want to estimate your taxes before then, you can look up your property's assessed value and your local tax rate. Your annual bill will be your assessed value times your tax rate.