How Are Property Taxes Calculated?

Local governments levy property taxes on residents to fund services like schools, sanitation, libraries, and police and fire departments. In Hawaii, property taxes average 0.28%, which means homeowners pay just a little more than $600 a year despite an average home value of over $615,000.

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On the other end of the spectrum is notoriously expensive New Jersey, where the average property tax rate is 2.49%. There, the yearly tab is more than $5,400 despite an average home price of just $335,600. So how is such a wide disparity possible and how are property taxes even calculated? Here’s what you need to know.

A Brief Introduction to Property Taxes

Counties, municipalities and school districts mostly determine the tax rate that’s levied on the properties within their boundaries. Owners of two nearby homes that are nearly identical to each other might pay higher or lower property taxes because they fall on different sides of a county line.

Property taxes — also called real estate taxes — account for about 17% of state and local revenues in America, according to the Urban Institute, more than sales tax, personal income tax and corporate income tax. Property taxes are a type of “ad valorem” tax, which means “according to the value” in Latin — properties are taxed based on what they’re worth.

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Property taxes are structured differently than other taxes, with many municipalities collecting them semiannually. They’re collected in arrears, which means that homeowners pay them at the end of a given tax period instead of paying them in advance. While some homeowners pay property taxes directly to their municipality, many pay them through an escrow account as part of their mortgage.

3 Steps to Calculating Property Taxes

Different governments use different methods to calculate property taxes, but they all follow the same framework and they all require some variation of the same three steps:

  1. Assess the value of every property in a given jurisdiction
  2. Determine each property’s taxable value
  3. Apply the local tax rate to each property’s taxable value

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Step 1: Assess the Property’s Value

Governments use one of three methods to determine a property’s value:

  • The sales comparison method: An assessor compares a property to similar properties that have sold recently in the immediate area. The assessor then makes adjustments for variables that may increase or decrease the property’s value, like remodeling upgrades or the addition of amenities. This is the most commonly used approach.
  • The cost method: In this case, assessors calculate what it would cost to rebuild your home from the ground up, factoring in the cost of materials, labor, and — if your property is older — depreciation.
  • The income method: Used mostly for businesses and commercial properties, this method assesses value based on the amount of income that the owner would earn by renting out the property.
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Step 2: Determine the Property’s Taxable Value

The local tax rate is just one variable that can make property taxes exorbitant in one place and barely noticeable somewhere else. Another big one is the percentage of each home’s value that a municipality levies taxes on. That, too, can swing wildly from one place to the next.

If, for example, a home is valued at $300,000 in a county that taxes 60% of a property’s value, the homeowner would be taxed on $180,000. The same house in a municipality that taxes 45% would be taxable up to only $135,000.

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Step 3: Apply the Local Tax Rate to the Property’s Taxable Value

Property taxes are often noted as the “millage” or “mill rate.” A mill represents one-tenth of one cent, or one one-thousandth of a dollar. The mill rate is the amount of tax you pay for every $1,000 of your home’s value.

Different entities, like counties, towns and school districts, can each levy their own mills on properties within their boundaries. A home’s property taxes are based on all the combined mills in the local tax district.

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To make the calculation, take all the combined mills and divide the sum by 1,000. Next, multiply the mill rate by the home’s taxable value to determine your property taxes.

For example, if there are 9.5 total mills in your local tax district and your home’s taxable value is $300,000:

  • Divide 9.5 / 1,000 to get 0.0095
  • Multiply 0.0095 x 300,000 to get 2,850
  • Your property taxes are $2,850

One final note — certain people and organizations might have their property taxes reduced or eliminated altogether through exemptions. These include the homestead exemption, senior citizen exemptions, religious exemptions and exemptions for homeowners with disabilities.

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About the Author

Andrew Lisa has been writing professionally since 2001. An award-winning writer, Andrew was formerly one of the youngest nationally distributed columnists for the largest newspaper syndicate in the country, the Gannett News Service. He worked as the business section editor for amNewYork, the most widely distributed newspaper in Manhattan, and worked as a copy editor for TheStreet.com, a financial publication in the heart of Wall Street's investment community in New York City.

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