How Property Taxes Are Calculated
Understanding how property taxes are calculated is often one of the most confusing challenges for homeowners. Calculations aren't always identical for all local governments, but they often follow some general rules.
Keep reading to learn some tips for figuring out exactly how much you'll pay in property taxes.
What Exactly Are Property Taxes?
Property taxes are a type of "ad valorem" tax—the term is Latin for "according to value"—so it follows that they're calculated based on an assessment of your property’s value. Local property taxes fund schools, fire departments, and libraries, and they can be a major source of funding for your city or county. In 2018, the Census Bureau estimated that 31% of all state and local revenue in the U.S. came from property taxes.
Some property tax bills show specific details on how much of your money goes toward which government and public expenses. Check with local authorities in your area to learn more about how your property tax dollars are spent.
The Property Assessment
Your home's value is determined by your local tax assessor’s office. Property assessments may be done every year or even just once every five years. It depends on state or local law. You should receive your value assessment first, and then your property tax bill a little later.
The assessment is based on the tax assessor's estimation of the market value of your property. Value is typically determined in one of three ways:
- Sales comparison: The assessor will compare your property to other similar properties that have sold in the immediate area in the recent past. They will then adjust for variables that may make your property more or less valuable than those that have sold. For instance, if you recently renovated your kitchen with high-end designer appliances that put other kitchens in the neighborhood to shame, then that could increase the assessed value of your home.
- The cost method: The assessor calculates how much it would cost to reproduce your home from the ground up, including materials and labor. They will factor in depreciation if your property is older. They will also add the value of your land to the overall assessed value.
- The income method: This is used predominantly for commercial and business properties. The assessor estimates how much income you would expect to receive if the property were rented out based on factors such as costs of maintenance, insurance expenses, and prevailing rental rates.
Calculating Property Tax
Assessing the value of your property is the first step in the process. After that, your property's assessed value is then multiplied by the local tax rate. This rate is also sometimes called a millage rate or mill rate. One mill equals one-tenth of one cent or $1 for every $1,000 of a property's value.
Different governments can charge varying mill rates. Rarely is anyone's property tax based on just one mill. For example, in Georgia, the statewide average mill rate is about 30 mills. That means the average property owner in Georgia pays roughly $30 in property taxes every year per $1,000 of their property's value.
Communities often determine how much tax revenue they will require in a given period, then set a mill rate commensurate with raising that amount of money through property taxation.
Property taxes are often set at state and local levels, which means you may pay different property tax rates than another home down the road across county lines. Returning to that Georgia example, the state millage rate is was 0.05 in 2015, but the state millage rate on all real and personal property has been phased out. The remainder of the property taxes that the average homeowner incurs is assessed on more local levels, such as by county authorities.
Let's walk through a hypothetical example. Assume that you own property that was recently assessed to be worth $250,000. Your local mill rate is 45. Multiply the property's value by 4.5% to arrive at your tax bill: $11,250. This is an annual rate, so—assuming tax rates remain consistent—you will pay $11,250 every year. If your mill rate is dropped to 15, your tax bill would also decrease, and you would only have to pay $3,750 in property taxes every year.
How Property Taxes Are Paid
You have options for how to pay your property taxes, though the specific options available to you will be decided at local levels. You may choose to pay property taxes as part of your monthly mortgage payment, or you may instead pay them in annual or semi-annual installments made directly to your local tax authority.