What Are Property Taxes and How Do They Work

A simple guide to understanding how property taxes are calculated, used, and how they impact your budget

Source: fidelity.com

Owning a home or property means more than just making mortgage payments—you’ll also owe property taxes. But what exactly are these taxes, and how are they determined? Let’s break it down in simple terms so you know what to expect and how to possibly save money along the way.

What Are Property Taxes

Property taxes are yearly fees charged by your local and state governments based on the value of your real estate. Whether you live in your home, rent it out, or use it for business, you’re likely responsible for paying property taxes.

These taxes fund essential services like schools, police, road repairs, and more—things that benefit the community.

How Property Taxes Work

Every year (or sometimes every few years), your local government reassesses the value of your property. This appraisal could be based on:

• Similar home sales in your area

• The cost to rebuild your home

• How much rental income the property could generate

Then, the government applies your area’s property tax rate to that value. If your property is assessed at $500,000 and your local tax rate is 1.2%, your bill would be $6,000 for that year.

Understanding the Property Tax Formula

Here’s how property taxes are generally calculated:

1. Assessed Value: Your property is appraised to estimate its taxable value. This may not match the market price if you were to sell it.

2. Tax Rate: The local tax rate is applied to that assessed value. These rates vary depending on your location and property type.

3. Exemptions: Some owners qualify for property tax exemptions—like seniors, veterans, or people with disabilities. Primary residences might also get special treatment.

Can You Appeal a Property Tax Bill

Yes, if you think your property’s value was overestimated, or you believe you should’ve received an exemption, you can file an appeal. In some areas, this can be done online or in writing. You’ll need supporting documents like a comparative market analysis to strengthen your case.

Are Property Taxes the Same as Real Estate Taxes

Pretty much. The IRS refers to them as “real estate taxes,” but most people call them property taxes. Just don’t confuse them with personal property taxes—which are for movable items like cars, boats, or machinery.

Are Property Taxes Deductible

Yes, in many cases. If you itemize your deductions and own a primary home or vacation property, you can deduct up to $10,000 of combined state and local taxes, including property taxes. For rental or investment properties, you can typically deduct the full property tax amount from your rental income.

Where Do Property Taxes Go

These taxes support vital local services such as:

• Public schools

• Police and fire departments

• Road and sidewalk maintenance

• Garbage and recycling collection

• Community development projects

Sometimes, your bill may include special assessment taxes for specific local improvements—like building new sidewalks or sewer lines in your neighborhood.

When and How Do You Pay Property Taxes

Payment timelines vary. Some places require a single annual payment, while others allow semi-annual or quarterly payments.

If you have a mortgage, your lender might include property taxes in your monthly mortgage payment. They collect the amount in an escrow account and pay the taxes for you when due.

What If You Don’t Pay Your Property Taxes

Skipping property tax payments can lead to serious consequences. At first, you’ll face late fees and interest. Eventually, the government can place a lien on your home—meaning they have the right to claim what you owe if you sell.

In more severe cases, your property could go into tax lien foreclosure, where the local government sells the lien or property to recover the debt.

Want to know if you're paying too much in property taxes or if you qualify for an exemption? Reach out to a local real estate expert who can help review your situation and guide you through the next steps.