What Is Property Tax?

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DEFINITION
Property tax is a tax that an owner of the property—such as a home, vehicle, or vacant land— pays to the local government based on the property's assessed value.

Property tax is a tax that an owner of the property—such as a home, vehicle, or vacant land— pays to the local government based on the property's assessed value. Commercial and industrial real estate, vacation homes, farms, timeshares, boating docks, and other property can also be subject to property taxes.

Even if you don’t own real estate or other property, it can be useful to understand property taxes, which can affect everything from rent prices to your local schools’ funding.

Definition and Examples of Property Taxes

Property owners pay property tax to local governments based on how the city, county, or state determines the value of the property, whether that’s land, the overall value of a home, a commercial building, or even a car. These taxes often fund schools, and other local government needs,  such as fire and police protection, libraries, city services, transportation and recreation. 

Property taxes can apply to all types of property, including boats, aircraft, and vehicles. 

But the term property tax tends to be used for real estate. In particular, many people focus on property tax regarding home-related taxes.

Residential property taxes ranged from 0.31% in Hawaii to 2.13% in New Jersey per year in 2019, according to The Tax Foundation, a tax policy nonprofit. As an example, a home valued at $500,000 with a 1% property tax rate means the homeowner would pay $5,000 per year in property taxes. 

Property taxes are typically managed at the county level, but there can also be specific property taxes for other jurisdictions like individual towns, cities, or school districts. Philadelphia, for example, has its own real estate tax on property owned within the city.

How Do Property Taxes Work?

Typically, a county or city assessor sets property values, and the county treasurer collects property tax payments. Depending on the location of a property, the relevant jurisdiction will typically send a property tax bill to the property owner based on the assessed value, payable in quarterly, annual or biannual payments.

Property taxes are an example of an ad valorem tax and are calculated based on a property’s assessed value. The assessed value may equal what the property would sell for on the open market, depending on local tax rules, or a percentage of that market value. 

In some states, individual taxing districts set a budget, which then helps determine the taxes, along with any special levies passed in that district.  In places like California, property taxes are limited to the home’s initial purchase price, plus inflation. In Texas, properties generally have to be reappraised based on market value once every three years.

Not paying property tax bills on time could lead to significant fees, interest charges, penalties, and potentially a tax lien certificate against the home. 

Many state, county and city property tax programs can reduce, defer or assist with the amount due for qualifying individuals, such as senior citizens, veterans, people with disabilities, widows, or people with limited income. To claim an exemption, you’ll need to file paperwork.

What Do Property Taxes Mean for Individuals?

Property taxes are important for individuals to understand whether or not they own a home. If you own real estate or hope to buy, then you need to budget for your property tax bills.

You may be able to afford mortgage payments if they are roughly equal to rent. But if you’re in an area where property tax bills can be reassessed at market value, then you may need to pay increasingly higher property tax bills. 

If you don’t own property, it’s still useful to understand local property taxes. Your rent likely doesn’t have a line item for property taxes, but the building owner’s tax payments generally impact what landlords charge for rent. if you’re in a high property tax area, then maybe your rent is a better deal than you assumed. 

Plus, it’s useful to know property tax amounts’ collection and use in your community. If you’re active in politics or have children in local schools, you may want to know how the government spends property tax money on education or other services.

Key Takeaways

  • Property owners pay property tax to government entities based on the property’s valuation.
  • In addition to real estate, property tax may apply to boats, aircraft, and vehicles.
  • Property tax often goes toward funding local government services.
  • Homeowners need to consider property tax rates when thinking about the total cost of ownership. 

Article Sources

  1. Tax Foundation. "How High Are Property Taxes in Your State?" 

  2. City of Philadelphia. “About the Philadelphia Real Estate Tax.”

  3. Sacramento County. “Proposition 13 and Real Property Assessments.”

  4. Comptroller.Texas.Gov. “Valuing Property.”