What Are Property Taxes? How They Work, What They Cost and Why They Matter
Written by
Daria Uhlig
Edited by
Elizabeth Constantineau, CFHC™
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Property taxes are local taxes homeowners pay on the value of their homes and land. They help fund public services like schools, roads, police and parks. Understanding how property taxes work — and how they’re calculated — can help you plan for annual payments and potentially lower your tax bill.
What Is Property Tax?
- Property taxes are real estate taxes that homeowners pay to their local governments.
- These taxes help fund various public services like schools, libraries, roads, parks, fire protection, emergency services and other infrastructure.
- Property tax rates vary by county, city and school district.
- The tax is an ad-valorem tax based on the assessed value of property.
Good To Know
Property tax is usually levied at the county and city level, so identical homes in different towns can owe different amounts.
How Property Taxes Are Calculated
Property tax calculations are based on a property’s assessed value and the tax rate for its county, city and school district.
The local assessor sets your home’s assessed value based on size, location and condition.
Local governments set the tax rate, which is usually a millage rate — the amount of tax due per $1,000 of assessed value.
Assessed Value vs. Market Value
Market value and assessed value have different uses.
- An appraiser estimates market value to determine how much a property would sell for on the open market.
- A tax assessor estimates market value, then calculates assessed value for tax purposes. The assessed value might equal market value, or it might be a percentage of market value — whatever state law and/or local rules mandate.
Property Tax Formula
The formula for calculating property tax is:
- Tax = millage rate x assessed value
Say, for example, a particular home has a tax rate of 4 mills, and the home’s assessed value is $300,000.
Here’s the easiest way to apply the formula:
- Determine how many thousands (1000s) there are in the assessed value. It’s 300 in this example because the assessed value is $300,000, or 300 1000s.
- Multiply 300 by the millage rate
- 300 x 4 = $1,200
Example Property Tax Calculations
Here are some more examples that demonstrate property tax calculations.
| Assessed Value | Millage Rate | Formula | Annual Tax |
|---|---|---|---|
| $250,000 | 5 mills | 250 x 5 | $1,250 |
| $350,000 | 6.5 mills | 350 x 6.5 | $2,275 |
| $500,000 | 8 mills | 500 x 8 | $4,000 |
What Is an Effective Property Tax Rate?
Effective property tax rate is the percentage of your property’s market value that you pay in property tax, and it demonstrates actual tax burdens. This is the formula:
- Effective tax rate = tax amount ÷ market value
Using the earlier example, of a $300,000 home with a $1,200 tax, here’s how that looks:
- 1,200 ÷ 300,000 = .004, or 0.4%
Whereas nominal (official) rate calculation methods differ from one county to the next, effective tax rates are always calculated the same way. That makes effective rates more useful for comparing taxes for different properties.
This table shows how differences in the way local governments set assessed values can make it difficult to compare identically priced homes in two different places.
| Assessed Value of $300,000 Home | Nominal Tax Rate | Tax Amount | Effective Tax Rate |
|---|---|---|---|
| $300,000 — 100% of market value | 7 mills | $2,100 | 0.7% |
| $150,000 — 50% of market value | 10 mills | $1,500 | 0.5% |
At first glance, you’d think that the 7 mill tax rate would result in a lower tax. The effective rates show that’s not the case.
How Much Are Property Taxes in the U.S.?
The average property tax is $1,889, according to a Tax Foundation analysis of the most recent Census data. But the wide variation makes averages meaningless when it comes to figuring out how much you might pay.
Here are the effective tax rates in each of the highest-taxed states in the U.S., per a Rocket Mortgage analysis of the Census data.
| State | Effective Tax Rate | Tax on a $300,000 Home |
|---|---|---|
| New Jersey | 2.23% | $6,770 |
| Illinois | 2.07% | $6,210 |
| Connecticut | 1.92% | $5,760 |
| New Hampshire | 1.77% | $5,310 |
| Vermont | 1.71% | $5,130 |
And here is the tax rate for each of the five lowest-taxed states.
| State | Effective Tax Rate | Tax on $300,000 Home |
|---|---|---|
| South Carolina | 0.51% | $1,530 |
| Nevada | 0.49% | $1,470 |
| Colorado | 0.49% | $1,470 |
| Alabama | 0.38% | $1,140 |
| Hawaii | 0.27% | $810 |
Why Property Taxes Vary So Much by Location
Three factors cause the large differences in property taxes by location.
- Each local government sets its own tax rates according to its revenue needs.
- Some local governments rely more heavily on property taxes than others.
- Property tax is an ad valorem tax, based on property values. Those values vary widely.
How Property Taxes Affect Your Monthly Housing Costs
Property tax payment is mandatory. Failure to pay can eventually cause you to lose your home. So when you apply for a mortgage loan, the lender includes the following to calculate your debt-to-income ratio (DTI):
- Property tax amount
- Homeowners insurance
By including both of these, the lender can determine the total house payment you can afford.
Here’s an example:
- The lender considers $2,000 per month affordable for you.
- Your property tax and insurance would total $300 per month.
- Your mortgage principal and interest would have to be $1,700 per month or less.
Most lenders add 1/12th of your annual tax and insurance to each monthly mortgage loan payment. They put the tax and insurance portions into an escrow account, then pay the bills on your behalf.
How and When You Might Lower Your Property Taxes
Here are five ways to be proactive in lowering your property taxes:
- Appeal your next property tax assessment if your home is overvalued
- Check for errors in square footage or listed features
- Limit major home improvements that could raise your home’s value
- Apply for exemptions if you’re a senior, veteran or have a disability
- Pay on time to avoid penalties and compounding interest
Key Property Tax Terms To Know
- Ad valorem: Literally, “according to the value”
- Appeal: A formal challenge to a property assessment, typically filed to lower the assessed value
- Assessment: An estimate of a home’s value used to determine property tax
- Assessed value: The dollar figure used as the basis for calculating property tax
- Effective tax rate: The amount of tax paid, expressed as a percentage of the home’s market value
- Market value: How much a home would likely sell for on the open market
- Mill: One-thousandth of a dollar (1/1000), used to express tax rate
- Property tax: Imposed by local governments to raise revenue for public services and facilities
- Tax rate: The percentage or millage applied to your home’s assessed value to calculate tax
Final Takeaways
These are the most important points to take from this guide:
- Property tax is based on your home’s assessed value and your local tax rate.
- It pays for public services like schools, roads and emergency response.
- You can calculate it using this formula: assessed value x millage rate
- Common ways to reduce your tax bill include exemptions and appealing your assessment.
Property Taxes FAQ
Still have questions about property tax? Find the answers here.- What are property taxes?
- Property taxes are taxes levied by local governments to raise revenue for public services and facilities. They're ad valorem taxes — that is, taxes based on value — of real property (real estate) in this case.
- How are property taxes calculated?
- Property taxes are calculated by multiplying the tax rate by the assessed value of the property.
- What is a typical property tax rate?
- Tax rates vary wildly among different counties, cities and school districts, so there is no typical rate, per se. But you calculate effective tax rates as explained above to compare taxes for different properties if you're in the market to buy a home.
- Why did my property tax bill go up?
- A tax bill goes up when a local government increases tax rates to raise more revenue, or when a new assessment finds that the home's market value has increased.
- Are property taxes included in my mortgage?
- Usually, yes. Mortgage payments that include them are called PITI payments, for principal, interest, taxes and insurance.
- Can I appeal my property tax assessment?
- Yes, if you believe the tax assessor overvalued your property. You'll need proof of that claim.
Caitlyn Moorhead and Andrew Lisa contributed to the reporting for this article.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- Thomson Reuters. "Ad valorem tax."
- Rocket Mortgage. 2025. "What is assessed value and how is it determined?"
- National Association of Counties. "County structure, authority and finances."
- Tax Foundation. 2025. "Property Taxes by State and County, 2025."
- Rocket Mortgage. 2025. "Property taxes by state: Ranked from highest to lowest in 2025."
- U.S. Bank. "Homebuying decoded: What is a debt-to-income ratio?"
- Consumer Finance Protection Bureau. 2024. "What is PITI?"
